What is a Direct Stock Purchase Plan (DSPP)?

When you buy vegetables from a grocery store, you know farmers grow the vegetables, then a distributor might buy from the farmer and sell the vegetables to grocery stores, and stores then sell those vegetables to you, the consumer. This is comparable to investors using a broker to buy shares of stock, because there is a middle person involved.

But you can sometimes purchase food directly from growers, perhaps at farmers markets. This direct form of purchasing can be comparable to participating in a direct stock purchase plan (DSPP).

Direct Stock Purchase Plan Explained

At a high level, DSPP is a term that pretty much means what it says. When a company offers a DSPP, individual investors can directly purchase shares of that company’s stock without the need for broker involvement. If someone has a 401(k) retirement account at work and has stock from the employer’s company included in a portfolio, then this process has some similarities.

Briefly returning to our vegetable analogy, buyers can sometimes get a better price from a farmers market, because the distributors and grocery stores may mark up their prices to cover their own costs.

With a DSPP, investors directly purchase shares of stock, sometimes at a small discount, which adds value to the purchase. Discounts can range from 1% to 10% to encourage investors to buy more of the company’s stock.

More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account.

Then, that dollar amount is applied toward the DSPP, meaning toward purchasing shares in that company’s stock, which can include fractions of those shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock. (The price of a share of stock can fluctuate, but this is how the process works, overall.)

One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500, usually with very low fees to purchase shares or, sometimes, no fees.

This investment strategy can also work for people who want to focus on a select number of quality stocks, long term. It might be a good strategy for people who simply want to have a direct method of ownership, without an intermediary—and some investors appreciate the DSPP programs that allow dividends to be automatically reinvested into additional shares of stock (something that not all companies that offer DSPP programs do).

Conversely, this may not be the preferred method of choice for investors who value diversification, because buying DSPPs tends to create a portfolio based on a small group of stocks. Plus, not all companies offer this investment option, so focusing solely on DSPPs can limit choices.

Note that there may be restrictions placed upon when shares can be purchased. Companies often put maximum limits on how much an individual investor can purchase, too. One well-known home improvement store, as just one example, puts an annual cap of $250,000 on their DSPP program. And, when selling DSPP stocks, multiple types of fees can be charged that can significantly impact gains made.

Finding DSPP Opportunities

Armed with information about how to buy directly from companies, at least in general, investors may want to explore what specific opportunities exist. Perhaps they follow the stock market and already have a publicly traded company in mind.

In that case, they can go to that company’s investor relations website to see if that company offers this type of investment opportunity. They can also search on Google to see if DSPP information is available.

If investors decide to buy through a direct stock purchase plan, they can use a service like ComputerShare.com . It provides a listing of companies that sell stocks through a DSPP—these searches can be filtered in several ways to find the opportunities that fit investor parameters.

What to Consider Before Buying DSPPs

When internet investing was new, people typically needed to pay significant fees to brokers to buy stock—so, in that era, DSPPs could be real money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.

Plus, many DSPPs charge initial setup fees, and may have other fees, including ones for each purchase transaction or sale. Although they may be small, in and of themselves, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one, rather than one where investors regularly buy and sell.

Not everybody has the same type of investment personality—what’s important is for each investor to be clear about what type they are and act in tandem with that.

What Kind of Investor?

When people are relatively new to investing, they may not know the answer to that question yet—and that’s okay. As part of the process, though, investors will want to determine, at a minimum, their risk tolerance—in other words, the amount of risk a person is willing to take with investment dollars.

People who are risk takers might be what’s called a growth investor. This type of person might be willing to invest in high-priced stocks that have plenty of potential, even if they’d never heard of them before. More conservative investors can be called “income investors,” people who like to invest in stable, “blue chip” companies that are well established.

It isn’t unusual for younger investors to be more willing to go for growth, with older people going the more conservative route. This isn’t universally true, though, and it’s okay to experiment with investment strategies.

Buying That First Share of Stock

People with a retirement plan are probably already investing in mutual funds. When thinking about buying stock outside of retirement account investing, then it can make sense to complete a couple other financial items first, including:

•   Getting rid of high-interest debt
•   Building an emergency savings of three to six months’ worth of salary to cover unexpected expenses

Now, here’s what it means when someone buys a share of stock. Investors are really buying a piece of a company, becoming a partial owner of that company.

Then, when that company does well, investors can be rewarded by having shares of stock increase in value and/or receiving dividends. If the company doesn’t do well, then that can be reflected in a lesser stock value.

There are two main types of shares: common stock and preferred stock. Generally, when people talk about buying and selling shares of stock, they’re referring to common stock that comes with voting rights. Ideally, investors would like for the stock owned to increase in value, which would give them the option to sell their shares at a profit.

And, if the company is doing well, they may issue dividends, perhaps on a quarterly basis. Investors could use that as an income stream or reinvest those dollars into more shares of that company’s stock.

If a company goes bankrupt, common stockholders are placed behind creditors and another type of stockholders in line—preferred stockholders—in getting payment (which means common stock investors very well might lose all of what they’d invested in that company).

Owners of preferred stock, meanwhile, would get preferential treatment if a company was liquidated, being next in line behind creditors. Owners of this type of stock may or may not have voting rights but could benefit more fully when the company is profitable.

Nowadays, nearly all stock trading is handled online, which has made the process less expensive and more hands-on for the typical investor—at least compared to the days when people needed to walk into a stockbroker’s office to place an order.

Today, they simply need to open up an account with an online brokerage firm and then they can typically handle transactions from their computers or mobile devices. This, of course, raises the question about where a brokerage account should be opened. New investors can compare fees, as one step, while noting that it might be worth it to pay a bit more if the service is good.

When it’s time to actually buy that first share of stock, the decision may be made to invest in a company that is already familiar to the investor—and then invest a small amount as a trial.

Any time a share of stock is purchased, at any company, some degree of risk comes along with it—how much depends upon what is happening with that specific company and the overall levels of turbulence in the market.
Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified.

Portfolio diversification is desirable because it helps to spread out the degree of risk—that’s because, if one stock’s value decreases, others may rise to balance out that portfolio. Some investors, for example, have a portfolio with 40 to 50 different stocks to provide diversification.

Researching Investment Opportunities

Before investing in a company, it makes sense to research how well they’ve been performing. How profitable have they been? How do they compare against their competitors?

Most companies must provide information about their financial performance and major corporate changes; this information can be found on a company’s website in the Investor Relations section or at the Securities and Exchange Commission site.

Before investing, it can make sense to look at a company’s quarterly and annual balance sheets, as well as their income statements and cash flow statements. Another strategy is to review their retained earnings statement and shareholders’ equity information.

When reviewing a company’s financial information, check its after-take income—or what’s often called their “bottom line.” This is the number that’s most watched by a typical investor because it’s often directly related to the price of that company’s stock.

This information can be found in quarterly and annual financial statements and, besides looking at how good current earnings are, it can make sense to check the statements to see how consistent earnings have been.

Another idea is to review return on sales, also called operating margins. This will show investors how much a company makes in profit after paying associated costs, not including interest or taxes. To calculate this metric, find the company’s operating profit and then divide it by its net sales. A good (higher) number is a positive sign while a lower number may indicate more risk for investors.

As another strategy, check the cash flow statements—cash flow has been described as the life’s blood of a company’s financial position. Then there’s a calculation known as asset utilization, and it helps people to know how well a particular company is doing when compared to other ones.

If someone is considering investing in Company A, for example, and that company has revenues of $200,000 and assets of $100,000, its asset utilization rate is 2:1. In other words, for every dollar they have in assets, they have $2 being generated in revenue. How does that compare to Company B? Company C?

Investors sometimes also review a company’s debt-to-equity ratio (also called debt-to-capital ratio) to determine how a particular company funds its business operations and pays for its assets. Ideally, a company will have enough short-term liquidity to pay for business operations as well as its growth. This figure does not take into account any long-term debt held by the company.

Are its earnings going up, overall? Are there noticeable patterns—perhaps lower earnings in the winter for outdoor entertainment corporations? When lower earnings exist, does it fit the seasonal pattern observed—or is something else potentially going on?

Besides doing investigative work, investors might want to read financial news, with reputable sources including The Wall Street Journal, Bloomberg, MarketWatch, and CNBC, among others.

Investors can browse through them to see how the market is doing, overall, as well as how individual sectors are performing. If interested in specific companies, they can read about their performances.

Considering Exchange-Traded Funds and Mutual Funds

If someone is new to investing, choosing exchange-traded funds (ETFs) and mutual funds may be a good introduction to the investing world. These types of investment vehicles can offer more diversity, which can help to mitigate risk. One way to think of ETFs is as a basket of securities that gives investors access to a broad variety of markets.

Mutual funds, meanwhile, also provide opportunities for people who want to get started investing with small amounts of money. Because mutual funds are like suitcases filled with different security types, they provide instant diversification.

SoFi Invest

When it’s time to start investing online, that’s also the time when people need to choose their broker.
With SoFi Invest®️, people can invest with ease, no matter what level of investment experience exists.

One option is the active investing route, choosing stocks, ETFs, and cryptocurrency, getting started with as little as $1 and avoiding the high costs associated with some other methods of investing. And, at SoFi, stocks and ETFs can be traded for free.

Because diversity is so important, SoFi makes it easy for investors to spread their money out over different investment vehicles, including Stock Bits, which allows people to invest in their favorite companies without needing to commit to a whole share.

Or, if investing sounds like a good idea but the heavy lifting involved doesn’t, there is the automated investing option.

Recommendations are made through sophisticated computer algorithms and help with goal-setting, rebalancing of portfolios, and diversification. Best of all, when choosing automated investing at SoFi, investors can still have access to human financial advisors.

SoFi Invest allows you to invest your way, all in one place.


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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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

SOIN20017

Read more

What is a Quiet Period?

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

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

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

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

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

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

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

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

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

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

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

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

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

History of the Quiet Period

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

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

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

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

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

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

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

Violation of the Quiet Period

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

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

What to do During a Quiet Period

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

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

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

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

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

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

Don’t Keep a Lid on Your Investments

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

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

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

Learn more about SoFi Invest®.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.

SOIN19120

Read more

What is The Average Rate of Return on a 401K?

If your employer offers a 401(k) plan, you’ve probably wondered if it’s really the right place to put a portion of your hard-earned money every month.

You’ve likely been told that the earlier you start saving for retirement, the better off you’ll be. But how can you know that the average rate of return on your 401(k) investments will be the same or more than other available options?

After all, if you’re going to make sacrifices now to put money toward the future, you want it to be the best retirement possible.

A Few 401(k) Basics

To understand what a 401(k) has to offer, it can help to know what it is. The IRS defines a 401(k) as “a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”

In other words, employees can choose to delegate a portion of their pay to an investment account that is set up through their employer.

And because participants put the money from their paycheck into their 401(k) on a pre-tax basis, those contributions reduce their annual taxable income.

Taxes are deferred on contributions and growth in a 401(k) account until the money is withdrawn (unless it’s an after-tax Roth 401(k)).

A 401(k) is a “defined-contribution” plan, which means the participant’s balance is determined by contributions made to the plan and the performance of the investments the participant chooses.

That makes it different from a “defined-benefit” plan, or pension, which puts the investment risk on the plan provider and guarantees the employee a monthly income in retirement.

Employers aren’t required to make contributions to employee 401(k) plans, though many do—typically by offering to match a certain percentage of an employee’s contributions.

Besides the tax advantages and the convenience of automatic 401(k) payroll deductions—which can help make saving simpler for everyone, but especially for those who might otherwise lack the discipline—it’s the employer match that can be a big draw for plan participants. It’s tough to turn down free money.

Employer-sponsored 401(k)s have made investing accessible to more Americans, and the plans encourage saving for the long-term. Compound growth over time can be one of an investor’s most valuable tools.

And the less money there is coming out of a paycheck because of taxes, the more there is available for compounding. But there are other factors to consider when looking at a 401(k).

One of the less-talked about benefits of 401(k) plans is that they’re protected by federal law. The Employee Retirement Security Act of 1974 (ERISA) sets minimum standards for employers that choose to set up retirement plans and for the administrators who manage them.

Those protections include a claims and appeals process to make sure employees get the benefits they have coming—that there is a right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged, that certain benefits are paid if the participant becomes unemployed, and that plan features and funding are properly disclosed. Another plus: ERISA-qualified accounts are protected from creditors.

401k Fees, Vesting and Penalties

But there are some downsides for some 401(k) investors. The typical 401(k) plan charges a fee of 1% of assets under management. That means an investor who has $100,000 in a 401(k) could pay $1,000 or more. And as that participant’s savings grow over the years, the fees could add up to thousands of dollars.

Fees eat into your returns and make saving harder—and there are companies, including SoFi Invest®, that don’t charge management fees on their investment accounts. (If you’re unsure about what you’re paying, you should be able to find out from your plan provider, HR, or you can do your own research on various 401(k) plans.)

Although any contributions a participant makes belong to that individual 100% from the get-go, a vesting schedule may dictate the degree of ownership the employee has when it comes to employer contributions.

And don’t forget, some of the money in that tax-deferred retirement account also belongs to Uncle Sam. And he wants 401(k) investors to keep growing their savings for retirement.

So besides any other taxes due when there’s a withdrawal, if a participant decides to take money from a 401(k) before reaching age 59½, there’s usually a 10% penalty. (Although there are some exceptions.) And at age 70½, retirees are required to take minimum distributions from their tax-deferred retirement accounts.

Another thing to consider when looking at signing up for a 401(k) is what kind of investing you’d like to do. A lot of 401(k) plans have a slim selection of investments to choose from.

Employers are required to offer at least three basic options: a stock investment option, a bond option, and cash or stable value option.

Many offer more than the minimum, but they stick mostly to mutual funds. That’s meant to streamline the decision-making for investors who might be overwhelmed by too many choices and suffer from analysis paralysis. But for those looking to diversify outside the basic asset classes, it can be limiting.

How Do 401(k) Returns Hold Up?

It would be nice if we could know the average rate of return to expect from a 401(k). But the answer is, it depends. It depends on the investments a particular plan has to choose from and the portfolio a particular participant creates. And it depends on what the market decides to do from day to day and year to year.

Based on past numbers, the classic 60/40 portfolio—the moderate asset allocation common among investors participating in 401(k) plans—generally provides an annual return that ranges from 5% to 8% .

But that doesn’t mean a 60/40 investor will always be in that range. Sometimes that mix will have double-digit returns. Sometimes, it will drop down to negative numbers.

And no one can know how the strategy will fare as the market expands and evolves. (A financial professional may be able to help you analyze how your particular portfolio choices would have done during down markets, like those we experienced in 2000 and 2008.)

A basic 60/40 mix, which allocates 60% to equities and 40% to bonds/cash investments, is meant to maintain balance in a portfolio as the market fluctuates, minimizing risk while generating a consistent rate of return over time—even when the market is experiencing periods of volatility.

Stocks have the greatest potential for growth over time. Since 1926 , large stocks have returned an average of 10% per year, while long-term government bonds, which are considered more stable, have returned between 5% and 6%.

The 60/40 mix was popularized by Jack Bogle, the late founder of The Vanguard Group who is credited with creating the first index fund. And it’s easy to accomplish with the mutual funds available through 401(k) plans. But not every investor has to—or should—go with that exact ratio.

Asset allocation is usually based on an investor’s risk tolerance and time horizon—the amount of time until an individual will be ready to tap his or her retirement funds.

Retirement plan participants can figure out their best mix on their own, with the help of a financial advisor, or by opting for a target-date fund—a mutual fund that bases asset allocations on when the participant expects to retire.

A 2050 target-date fund will likely be more aggressive—it might have more stocks than bonds and will typically have a higher rate of return. A 2025 fund will lean more toward safety, protecting an investor who is nearer to retirement, and might be invested mostly in bonds. (Again, the actual returns an investor will see may be affected by the whims of the market.

But this is how these funds are targeted.) Most 401(k) plans offer target-date funds, and they make investing easy for hands-off investors. But if that’s not what you’re looking for, and your 401(k) plan makes an advisor available to work with you, you may be able to get more specific advice. Or, if you want more help, you could hire a financial professional to work with you on your overall plan as it relates to your long- and short-term goals.

Another possibility might be to go with the basic choices in your workplace 401(k), but also open a separate investing account with which you could take a more hands-on approach—maybe a traditional IRA if you’re still looking for tax advantages, a Roth IRA if you want to limit your tax burden in retirement, or an account that lets you invest in what you love, one stock at a time.

Making the Most of Investment Options

Whether it’s your only retirement account or not, it’s up to you to manage your employer-sponsored 401(k) in a way that makes the most of the options it offers.

One way to start is by familiarizing yourself with the rules on how to maximize the company match. Is it a dollar-for-dollar match up to a certain percentage of your salary, a 50% match, or some other calculation? It also helps to know the policy regarding vesting and what happens to those matching contributions if you leave before you’re fully vested.

With or without help, taking a little time to assess the investments in your plan could boost your bottom line, and you may be able to tailor your portfolio to better accomplish your financial goals. Checking past returns can provide some information when choosing investments and strategies, but looking to the future also can be useful.

If you have a career plan (will you stay with this employer for years or be out the door in two?) and a personal plan (do you want to buy a house, have kids, start your own business?), it may help you decide how much to invest and where to invest it.

Have you lost track of the 401(k)s you left behind at past employers? It may make sense to roll them into your current employer’s plan, or to roll them into a separate IRA outside of your workplace. You might need to update your portfolio mix, and you might be able to eliminate some fees.

Keep in mind that there are different contribution limits for 401(k)s and IRAs . For those under age 50, the 2020 contribution limit is $19,500 for 401(k)s and $6,000 for IRAs. For those 50 or older, the 2020 contribution limit is $26,000 for 401(k)s and $6,500 for IRAs. Other rules and restrictions may also apply.

The good news here is that investors have options as they save for the future. They can be as aggressive or as conservative as they want by choosing the investment mix that best suits their timeline and financial goals.

They can stick with one type of retirement account or fund, or they can diversify their investments and strategies with multiple accounts. And they can be hands-off or hands-on. The only thing they can’t afford to do is nothing.

If you have questions about how 401(k)s and other investment plans can benefit you as you work toward your goals, it can help to get some professional guidance.

With a SoFi Invest account, you’ll have complimentary access to financial advisors who can talk to you about diversifying your portfolio and maximizing the money you have to invest now and in the future.

You won’t pay transaction or SoFi management fees. And you can trade stocks online and ETFs yourself with active investing, or let SoFi put together an automated portfolio based on your input.

When you’re ready to invest, check out SoFi Invest, and get help building a plan for the future.


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

SOIN19089

Read more

How to Know When to Sell a Stock

Whether on TV, on the radio, or from your third cousin at the Thanksgiving dinner table, there is a lot of chatter dedicated to the discussion of which stocks are hot buys.

For many investors, buying and researching what stocks to buy is fun and interesting. Others are lured in by the chance to pick the next big winner.

The desire to identify a great stock pick taps into our human nature. We love to talk about what investments to integrate into our portfolios in the hope we turn a profit.

Conversely, our human nature can sometimes make it difficult for us to let go of a stock, whether that stock has done poorly or it has been on a ship to the moon.

You’ve probably noticed, but there isn’t a lot of discussion over the airways on the decision of when to sell a stock. This could be because it can feel like a tricky decision to make. And the decision isn’t easier whether that stock has done really great or if it has been a total dud.

Here are some ideas you could keep in mind if you own stock and are wondering when to sell a stock for profit or when to sell a stock at a loss.

Why Selling Stock Is Hard

If you’re having a difficult time making a decision about whether to sell a stock, you’re not alone. This decision can tap into a lot of different human emotions.

For example, humans can experience something called loss aversion, where they have a physical reaction to the thought of losing money.

The thought of selling stocks at a loss can trigger this emotion, and it can make it hard to sell even when a person logically understands that the money could be better used in another stock or investment. We may want to hold onto that investment, hoping that it improves.

On the flip side, knowing when to sell a stock at a gain can be equally as difficult. After a stock has a precipitous rise, it can be tough to sell because the inclination is to believe that the stock may continue to rise.

This feeling could be exasperated by hubris, the feeling that it was because of your intelligence that the stock has done so well, or good old-fashioned greed (which is a totally natural reaction).

Beyond the ways our brains are working against us, there is no universal protocol for selling stocks. There are no rules for making a good decision.

And often, there is no one right answer, because knowing how a stock will move forward requires knowing what will happen in the future. Good luck with that.

Trying to Time the Market

Before discussing valid reasons you may want to sell a stock, let’s talk about what might not be a good reason to sell a stock: Making a knee-jerk reaction to the recent performance of that stock.

This can be classified as attempting to time the market. Even the experts cannot always buy at the bottom and sell at the top. Know that there is no perfect equation and that it is not science.

It can be tempting to sell a stock based on a big dip or bump in price, but the recent price movement alone might not give a complete picture of the current value of a stock.

It may help to remember that a stock is something that trades in an open marketplace and that prices shift due to the buying and selling of these stocks.

This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as geopolitical or economic events or announcements) as they do with the health of the underlying company.

When You Might Sell a Stock

There are several reasons you might want to consider selling a stock. If you’re currently in this position, you may want to weigh several of these ideas against one another.

Please note that none of these methods amount to a recommendation, but are ways to think about the same decision from within different frameworks.

1. When You No Longer Believe in the Company

When you bought the stock, you presumably did so because you believed that the company was promising and/or that the price was reasonable.

If you were to believe that the underlying fundamentals of the business were in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

Most businesses won’t last, or be successful, forever. That’s simply the nature of running a business. There are many reasons you may lose faith in a company’s underlying fundamentals.

For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems, among other things.

Part of the trick here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year and what feels like it could be the start of a more sustained change within the business.

2. Opportunity Cost

Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.

Same goes for investing—for each stock you buy, you are doing so at the cost of not holding some other stock.
No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars.

This is easier said than done because we are emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.

3. The Valuation Is High

Oftentimes, stocks are looked at in terms of their price-to-earnings (P/E) ratio. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future.

But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons. First, because the price has increased without a corresponding increase in the expected earnings for that company.

And two, because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. Personal Reasons

Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing the money for living expenses. If this is the case, you may want to consider a number of factors in choosing which stock to sell.

You may make the decision based purely off of which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook. Or, you may make the decision based on tax reasons.

5. Taxes

The ubiquitous saying goes, “don’t let the tax tail wag the investment dog,” meaning that tax strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.

It may be possible to offset some capital gains with capital losses, which are acquired by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional.

Alternative Solutions

If making the decision about when to sell a stock is causing you to lose sleep or is something you don’t feel ready for, it may be time to consult the help of a professional or seek out investment strategies that don’t require making such a decision.

To hire the help of a professional, you might want to bring someone on who will act as your fiduciary.
Fiduciaries are required by law to make recommendations in the client’s best interest. A fiduciary could be an individual, a financial planning firm, or an online investment service and platform like the one offered by SoFi.

With SoFi Invest®, you have the opportunity to choose between two investing methods. The first, SoFi Active Investing, is a platform that allows you to actively buy, sell, and trade stocks online and other investments, like exchange-traded funds (ETFs).

But if making that decision about when to sell stocks (and when to buy them) is something you are looking to get away from, SoFi Automated Investing may be more your style.

With Automated Investing, SoFi builds an investment portfolio of ETFs using your goals, risk tolerance, and investing time horizon as a guide.

SoFi manages both the short-term and long-term upkeep of the portfolio, including making shifts to your strategy as your goals change. With this service, you’ll never have to make a decision regarding the management of your portfolio.

Best of all, this management service is provided at no cost to you. Whether or not you opt for using an automated investment service (also known as a robo-advisor), using funds may be a helpful solution to the problem of when to sell a stock. Funds, whether they be mutual funds or ETFs, generally hold many other investments.

For example, an S&P 500 mutual fund (or ETF) holds all 500 companies held in the S&P 500 index. With the purchase of just this one fund, you are actually buying into the 500 stocks that are currently measured by the S&P 500 index.

In this way, many funds are already diversified investment holdings. For many people, they may be a solid strategy for long-term investing.

With a fund-based buy and hold strategy, you could largely avoid the decisions involved in managing a portfolio of stocks, such as when to sell stocks and when to hold onto them.

When choosing funds, you might want to consider the composition (what types of stocks are held within the fund) and the fees involved with owning the fund.

Also, you may want to differentiate between index funds and managed funds. Index funds mimic some particular part of the overall stock market and don’t involve an active manager.

Just as it sounds, managed funds have an active manager making decisions about what stocks are held within the funds. Managed funds are typically more expensive than index funds, so be sure to make sure the fee is worth it.
There’s no doubt about it, managing a portfolio of stocks can feel like a full-time job. What to buy and when to sell at a loss or when to sell for a profit might all be considerations on an ongoing basis.

Investment portfolios require upkeep, and so either an investor does it or they hire someone or a service to do it for them. Ultimately, it will be up to the investor to decide which of these makes sense for them.

Ready to have an investment portfolio that is fully managed for you? Check out SoFi Invest.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.

SOIN19127

Read more

Investing for Beginners: Basic Strategies to Know

As an investor, you are unique. And as you start building your portfolio, there are many strategies you can draw upon to help you achieve your personal financial objectives. Which you choose will depend on your needs and the goals you are trying to accomplish.

Choosing an Investment Strategy

Say you’re in the market for a new pair of shoes. You’ll likely want to choose something that will last a long time, is a comfortable fit, and doesn’t leave you wondering whether you made a mistake when you bought them.
The shoes should also fit your individual needs—are they for long-distance running, for work, for going out at night?

In many ways, choosing an investment strategy is like shopping for the right pair of shoes. You need one that fits your personal goals, whether those goals are saving for a down payment on a house, a child’s education, or retirement.

And you need a strategy that will be comfortable for you to pursue in the long-term. You don’t want to be tempted to switch strategies frequently, potentially upending your financial plan.

Ultimately, the best strategy (or mix of strategies) is the one that works for you. Here’s a look at some of the fundamental strategies that you may want to consider as you start to build out your investment portfolio for the first time.

Strategies for Building a Portfolio

Asset Allocation

An investment strategy that splits a portfolio among asset classes—including stocks, bonds, and cash—asset allocation helps strike a balance between investment risks and returns.

Each of the assets classes above behaves differently under different market circumstances, which means each has its own risk and return profile. For example, stocks tend to offer the potential for the highest returns. They can also be volatile, which means in addition to high highs, they may experience low lows.

Cash, on the other hand, tends to be extremely stable. The money in your savings account isn’t likely to go anywhere and might even be insured by the federal government.

Yet, the trade-off for that stability is the fact that savings accounts or other cash equivalents, such as certificates of deposit, offer relatively low returns, typically between 0.01% and 3% APY.

The proportion of each asset class that investors hold is related to their personal goals, time horizon, and risk tolerance. Time horizon is the amount of time an investor has to invest before they achieve their goals, and risk tolerance is an investor’s willingness to lose some of an investment in exchange for potentially greater long-term returns.

Asset allocation might shift over time. An investor in their 20s saving for retirement might have a portfolio made up of mostly stocks. Stocks could offer the greatest potential returns, and with 40 years before the investor might need the money, they may have plenty of time to ride out any downturns in the stock market.

A person who has already retired and needs much more immediate access to their cash may hold more fixed-income investments, like bonds, which are less volatile and therefore less likely to experience hard downturns at the time the investor needs them.

Diversification

One way to manage risks in a portfolio is through diversification, building a portfolio with a broad mix of investments across assets. Essentially, diversification can help investors avoid putting all their eggs in one basket.

Imagine for a moment a portfolio invested in just one oil stock. If the price of oil goes down, the entire portfolio suffers.

Now imagine a portfolio that holds stocks from all sectors, in companies of all sizes from all around the world. Not only that, but the portfolio holds a variety of bonds and even other investments like real estate.

Similar to asset allocation, the idea here is that these different investments will behave differently during changing market conditions. For example, U.S. stocks may not perform the same as European stocks, and energy stocks may not perform the same as medical company stocks.

With a diversified portfolio, as market condition changes—such as a drop in the price of oil—one group of investments may suffer while another may not, thereby spreading out risk.

Rebalancing

Your portfolio can change over time. During a bull market, you may find your stocks are performing well and that they now make up a much greater portion of your portfolio than they did before.

Remember that your portfolio is balanced based on your personal goals, time horizon, and risk tolerance. So when there is a shift in holdings, investors may want to buy or sell assets to bring their portfolio back in line with their planned asset allocation.

Strategies for Buying and Selling

Tax Efficiency

Tax efficiency is a measure of how much of your return stays with you and how much ends up going to the government. Keeping an eye on taxes can be an important part of maximizing your investment returns.

The first step in building a tax-efficient portfolio is to understand where the investments—whether in taxable, tax-deferred, or tax-free accounts—will be held. Taxable accounts include brokerage accounts, and income from these accounts may be subject to long- and short-term capital gains tax and other taxes.

Long-term capital gains tax is a tax treatment applied to investments that have been held for a year or more. Short-term capital gains tax is applied to investments that are held for less than a year and are pegged to an investor’s tax bracket.

Investors looking to minimize their taxes might want to hold on to investments for more than a year to be subject to the longer long-term capital gains rates.

Tax-deferred accounts, such as 401(k)s and traditional IRAs, allow investments to grow tax-free as long as they remain in the account. Investors fund these accounts with pre-tax dollars, and withdrawals made after age 59½ are subject to regular income tax.

Tax-free accounts, such as Roth 401(k)s and Roth IRAs, are funded with after-tax dollars, but investments inside the account then grow tax-free. When investors make qualified withdrawals from these accounts, they pay no additional taxes.

As a general rule of thumb, tax-efficient investments, such as regular stocks, may be held in a taxable account, while investors may want to hold inefficient investments, such as taxable bonds, in accounts that have preferential tax treatment.

Dollar-Cost Averaging

Dollar-cost averaging is a process by which investors invest on a regular basis, making purchases regardless of price. For example, an investor might choose to invest $100 a month in an index fund that tracks the S&P 500.

The share price for that fund will likely vary from month to month, though the amount of money the investor uses to buy shares does not. By design the investor buys fewer stocks when they are priced high and more when they are priced low.

This strategy might help investors mitigate buying high and selling low. And because investment is done on a regular schedule with a set amount of money, this strategy is one way for investors to avoid emotional investing.

Buy and hold

Investors who choose to use a buy and hold strategy will typically buy stocks and hang on to them for the long term, regardless of short-term market movement. Buy and hold investors believe that they will achieve some kind of return in the future despite fluctuations in the market on a short-term basis.

Fluctuations in the market are a normal occurrence, but investors may still get nervous and want to sell their stocks at the first sign of a downturn.

However, this tendency can work against investors, as selling a stock locks in any losses they may have experienced and means they could miss out on any subsequent rebound in price. A buy and hold strategy might help curb this tendency.

What’s more, the buy and hold strategy could help investors minimize fees associated with trading, which might help boost the overall return of the portfolio.

Strategies for Picking Stocks

Fundamental analysis

Fundamental analysis is a strategy that can help investors choose specific stocks to buy. When practicing fundamental analysis, investors look at public data like financial statements, revenue, earnings, future growth, and profit margins as well as broader economic factors when choosing a stock.

Fundamental analysis attempts to look at everything that affects a security’s value, including macroeconomic factors like overall market conditions and industry conditions and microeconomic factors such as company management.

Investors hope that a thorough examination of these factors can help them arrive at an intrinsic value for the stock. The price at which the stock is actually trading may be above or below this value, and by comparing this value with the current price, investors could determine whether or not it’s a good time to buy.

Technical Analysis

Unlike fundamental analysis, technical analysis does not try to identify an intrinsic value of a particular investment. Technical analysts believe that a stock’s fundamentals are already factored into the price of the stock so do not require individual attention.

So, when using this strategy, investors try to identify good investments by looking at statistical trends. For example, investors may look at factors such as price movement and trading volume. By identifying patterns and current trends, investors hope to be able to predict future patterns and trends.

Value investing

Value investing is a strategy that makes use of fundamental analysis. The basic idea behind this style of investing is that investors only buy stocks that are priced lower than their actual value and hold onto them for the long-term, or at least until they rise above the investor’s price target.

In other words, these investors are looking to buy stocks that are mispriced or priced at a “discount.” If an investor buys a stock at a lower price than they believe it is actually worth, chances may be good that the price of the stock will rise before the investor sells it.

Before buying any asset, investors should be sure to do their due diligence, learning as much about it as they can. In some cases, investors can lean on the expertise of others. Rather than try to identify values of stocks themselves, investors can buy mutual funds, index funds, or exchange-traded funds (ETFs) that hold value stocks that have already been identified by professional fund managers.

Growth investing

While value investors are looking for stocks that are priced less than they are worth, growth stock investors put much less emphasis on the current price.

They are focused on stocks that are likely to increase in value in the future, more so than other stocks in their industry or the market as a whole.

Growth investors tend to focus on young companies that have a lot of growth potential, companies in quickly expanding industries, and those that make use of new technologies and services.

There is no real formula for what to look for when identifying growth stocks. However, investors looking for growth opportunities might want to look at companies that have strong historical earnings growth in the recent past. Investors might also look at forward earnings growth.

Publicly traded stocks must make earnings announcements on a regular basis, and analysts will make earnings estimates shortly before these announcements are made. These numbers can help analysts approximate the fair value for the company.

Once again, investors can leave the analysis up to professionals and may choose to invest in mutual funds, index funds, or ETFs that invest in growth stocks. Investors interested in taking a hands-off approach through investing in funds may consider an automated investing account to help them build a portfolio.

Monitoring Your Portfolio

Your life is not static, and your goals and financial needs will change. For example, you may change careers, get married, have children, decide to retire early or decide you want to work longer than you had planned. Each of these milestones can affect your goals and how much money you need to save.

You could consider SoFi Invest®, which lets you invest however you feel most comfortable, whether that’s hands-on with active investing or letting automated investing do the work for you.

With SoFi Invest, there are no transaction or management fees, and you can speak to a financial advisor at no charge.

Ready to learn more about investment strategies and how to begin investing? Visit SoFi Invest today.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.
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.

SOIN19126

Read more
TLS 1.2 Encrypted
Equal Housing Lender