What Are Pink Sheet Stocks?

What Are Pink Sheet Stocks?

Pink sheet stocks are stocks that trade through the over-the-counter market or OTC rather than through a major stock exchange. The term “pink sheets” comes from the paper that stock quotes used to be printed on. Today, stock quotes and stock trading takes place electronically.

The over-the-counter market may appeal to smaller companies, companies that are reorganizing after bankruptcy or shell companies. A pink sheet stock does not face the same level of regulation as stocks from publicly traded companies that are traded on the New York Stock Exchange or NASDAQ.

A company may choose to sell shares on the over-the-counter market if it can not meet the listing requirements established by the Securities and Exchange Commission (SEC) or does not want the expense of going through the IPO process. Many pink sheet stocks are penny stocks.

Investors looking for bargain buys may consider dipping into the pink sheets market. But pink sheet stocks–and penny stocks, in particular — can be highly volatile so it’s important to understand both the risks and potential rewards.

What Is a Pink Sheet OTC?

Pink sheet stocks are those that trade over the counter, rather than via stock exchanges. OTC Markets Group provides quotes for pink sheet stocks, and broker-dealers execute trades directly with each other.

Pink sheet OTC trading happens on an open market that lacks the financial reporting rules mandated by trading on the NYSE, NASDAQ or another stock exchange. It’s not illegal, though the SEC warns investors to stay vigilant for potential scams or fraudulent trading involving the pink sheets market and microcap or penny stocks.

Listing Requirements

In order for a company to get listed on OTC pink sheets, they must file Form 211 with the Financial Industry Regulatory Authority (FINRA). Companies do this through a sponsoring market maker, or registered broker dealer firm. The sponsoring market maker accepts the risk of holding a certain number of shares in a pink sheet company to facilitate trading of those shares.

The Form 211 asks for financial information about the listed company. The broker dealer can then use this information to generate a stock price quote. Pink sheet over-the-counter stocks do not need to adhere to the same financial reporting requirements as stocks that trade on major exchanges.

Are Pink Sheets and OTC the Same?

Pink sheet stocks and OTC or over the counter loosely refer to the same thing: Trades that take place outside of the traditional stock exchanges. The company OTC Markets provides quotes for companies listed on the pink sheets, as well as the OTCQX and the OTCQB trading marketplaces.

The OTCQX allows for trading of companies that are not listed on traditional exchanges but still subject to SEC rules. The OTCQB includes emerging companies with a stock price of at least a penny that are not in bankruptcy, have a minimum of 50 beneficial shareholders who each own 100 shares, and annually confirm that information is up to date. Of the three, the pink sheet OTC marketplace has the fewest financial reporting requirements.

There are also companies that adopt regulatory and reporting standards to list with the Over the Counter Bulletin Board (OTCBB) system. This is another electronic stock quote system that displays stock prices for securities not listed on a national exchange. Since this requires regulation you wouldn’t find pink sheet stocks listed here.

Are Pink Sheets and Stocks the Same?

Pink sheet stocks are stocks, meaning each one represents an ownership share in a company. The primary difference between pink sheet stocks and other types of stocks, such as Blue Chip stocks, is how investors trade them. Investors trade pink sheet stocks over the counter, and other types of stocks on an exchange.

Pink sheet stocks may have much lower valuations than small-cap, mid-cap or large-cap stocks, or they may be newer companies that have yet to establish themselves in the market. This is why it’s possible to buy penny stocks or microcap stocks on the pink sheets for pennies on the dollar.

Pros and Cons of Pink Sheet Stocks

Pink sheet stocks have benefits and disadvantages, both for the companies that list over the counter and for investors. These may differ from exchange-traded stocks. Here are some of the most important pros and cons to consider when investing in pink sheet stock:

Benefits of Pink Sheet Stocks

From a business perspective, being listed on the pink sheets can save companies money, time, and headaches. Rather than going through the IPO process to become a publicly-traded company, pink sheet stocks circumvent the major stock exchanges and their listing requirements.

Foreign companies may choose the pink sheets to avoid SEC financial reporting rules. Additionally, companies delisted from a stock exchange may seek to trade on the pink sheets OTC market.

For investors, the appeal of pink sheet stock trading is the potential to pick up stocks at rock-bottom prices. If a company listed on the pink sheets takes off, that could result in significant profits for investors who bought in early. Because there are fewer reporting requirements, it’s possible to find a much broader range of stocks to invest in when trading on the OTC pink sheets.

Disadvantages of Pink Sheet Stocks

Trading on the pink sheets OTC can call a company’s reputation or credibility into question. Investors may wonder why a company is not seeking an IPO to get listed on a stock exchange or why a company has been delisted. That can make it difficult for a company to cement its footing in the marketplace and attract attention from new investors.

Investing in pink sheet stocks may have more risk than trading stocks on a major exchange, since there is less transparency around their finances. It can be difficult to “look under the hood” so to speak and get an accurate picture of a company’s fundamentals. That means investors are inherently taking on more risk when investing in the pink sheets simply because they may not know exactly what they’re buying.

In addition, pink sheet stocks may be thinly traded, meaning it can be more difficult to buy or sell shares. Allocating assets to pink-sheet stocks may not be appropriate for investors who want or need liquidity within their portfolio.

Finally, investors must consider the fees associated with trading pink sheet stocks, as fees can erode net returns and stock profit.

How to Find Pink Sheet Stocks

Finding pink sheet stocks can be as simple as searching the OTC Markets website. You can use the platform’s stock screener to filter for pink sheet stocks. The filter can tell you at a glance the stock’s ticker symbol, its country of origin, price and trading volume. You can also identify pink sheet stocks by looking for ‘PK’ at the end of their symbol on a stick ticker.

It may be helpful to use an online trading simulator to find pink sheet stocks. A simulator can help you to learn more about pink sheet stocks and penny stocks while simulating trades to estimate potential gains or losses. This can make it easier to familiarize yourself with how pink sheet stocks trade and what kind of volatility you might be able to expect before investing real money.

Pink Sheet Stock Investment Risks

Part of investing strategically means paying attention to risk management. Pink sheet stocks can present greater risk in a portfolio for a few reasons. For starters, there’s less liquidity surrounding these stocks due to lower trading volume. That could make it harder to unload shares of a penny stock or pink sheet stock if you decide that it’s no longer a good fit for your investment strategy.

The pink sheets market and over-the-counter trading in general can be more susceptible to stock volatility. Rapid price fluctuations could generate higher than anticipated losses if the price of a pink sheet stock nosedives unexpectedly.

Share dilution can also reduce the value of penny stocks or other pink sheet stocks. Dilution occurs when a company issues more shares of stock, watering down the value of the existing shares on the market.

Another issue with pink sheet stocks is that they can be susceptible to price manipulation or fraud. Unusual suspects might use shell companies, for example, to trade on the pink sheets for the purpose of laundering money or otherwise defrauding investors. Because there’s so little regulation and transparency surrounding these stocks, it’s important to do thorough research before investing to make sure the company is legitimate.

How to Invest in Pink Sheet Stocks

If you’re interested in investing in pink sheet stocks, you’ll need a brokerage account to get started. Specifically, you need a broker that offers pink sheet trading. Not all brokers offer this service so you may need to research different options for where to trade pink sheet stocks online.

Recommended: What Is a Brokerage Account?

Once you find a brokerage you can decide how much you want to invest in pink sheet stock. Given the higher degree of risk involved, it’s important to consider how much you could realistically afford to lose if a pink sheet stock or penny stock gamble doesn’t pay off. This can help you come up with a number to invest.

When choosing a broker, ask about any applicable commission fees. Brokerages may charge higher trading fees for pink sheet stocks versus stocks that trade on a major exchange, so it’s important to factor cost in when estimating your risk/reward potential.

Recommended: How to Open a Brokerage Account

The Takeaway

Investing in stocks may help you to build wealth for the long term. If you’re new to investing, you may want to start with trading stocks through an online brokerage account before diving into the over the counter market.

A great way to get started is by opening a SoFi Invest® online brokerage account. SoFi Invest makes it easy to begin building a portfolio of stocks, exchange-traded funds (ETFs), cryptocurrency and even IPOs.

Photo credit: iStock/PeopleImages


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Understanding the Different Stock Order Types

Understanding the Different Stock Order Types

There are several ways to execute stock trades, from the common and relatively simple market order, to more complex stop orders and timing instructions. Each type of order is a tool tailored to specific situations and needs, and can result in a different outcome.

It’s important to understand the types of order in the stock market thoroughly to know when and how to use them. That way you’ll be able to know which order will best help you reach your goals as you buy and sell stocks.

Stock Order Types Explained

Different types of stock orders have different outcomes for investors. The best stock order type for you will depend on your investing style and risk appetite. You’ll need to understand each of them, particularly if you’re working with a self-directed brokerage account.

Recommended: 50 Investment Terms Decoded

Here’s a look at the different types of stock orders:

Market Order

Market orders are one of the most common types of trade you’ll encounter. A market order is an order to buy or sell a security as soon as possible at its current price. These types of orders make sense when you want to get a transaction done as quickly as possible.

A market order is guaranteed to be carried out, or executed. Investors buying stocks with a market order will pay an amount at or near the “ask” price. Sellers will sell for a price at or near the “bid” price.

However, while you’re guaranteed that your order will execute, you do not get a guarantee on the exact price. In volatile markets, stock prices may move quickly, deviating from the last quoted price, although.

If you put in an order to buy a stock at an ask price of $50 per share, for example, but many other buy orders are executed first, your market order may execute at a higher price as demand rises.

Recommended: What Is a Market-On-Open Order (MOO)?

Limit Order

Limit orders are another common type of stock orders. They are orders to buy or sell stock at a specific price or better within a certain time period. There are two basic types of limit orders:

•   Buy limit orders can only be executed at the limit price or lower. For example, say you want to buy shares in a company only when prices hit $40. By placing a limit order for that amount, you can ensure your order only executes when that price, or a lower price, is reached.

•   A sell limit order executes when stock hits a certain price or higher. For example, if you don’t want to sell your stock until it hits $40 or more, a sell limit will ensure that you own the stock until it hits that price.

Stop Order

In addition to the more commonly used market orders and limit orders, brokerage firms may also allow investors to use special orders and trading instructions, such as the stop order, also known as a stop-loss order. Stop orders are orders to buy or sell a stock when it reaches a predetermined price, known as the stop price. Stop orders help investors lock in profits and limit losses.

You enter a buy stop order at a price that is above current market price, which can help protect profit, especially if you are selling short. On the other hand, a sell stop order is an order to sell a stock at a price below the current market price, which can help you limit their losses.

When a stock’s price reaches the stop order price, the stop order becomes a market order. Like a market order, the stop price is not a guaranteed price. Fast moving markets can cause the execution price to be quite different.

Stop-Limit Order

Stop-limit orders are a sort of hybrid between stop orders and limit orders. Investors set a stop price, and when a stock hits that price, the stop order becomes limit order, executed at a specific price or better.

Stop-limit orders help investors avoid the risk that a stop order will execute at an unexpected price. That gives them more control over the price at which they’ll buy or sell.

For example, say you want to buy a stock currently priced at $100 but only if it shows signs that it’s on a clear upward trajectory. You could place a stop-limit order with a stop price of $110 and a limit of $115. When the stock reaches $110, the stop order becomes a limit order, and it will only execute when prices reach $115 or higher.

Trailing Stop Loss Order

Investors who already own stocks and want to lock in gains may use these relatively uncommon orders. While stop-loss orders help investors buy or sell when a stock hits a certain stop price, trailing stop loss orders put guardrails around an investment.

For example, if you buy a stock at $100 per share, you might put a trailing stop loss order of 10% on the stock. That way, if, at any time, the stock’s share price dips below 10%, the brokerage will execute the order to sell.

Timing Instructions

Investors use a set of tools, known as timing instructions, to modify the market orders and limit orders and tailor them to more specific needs.

Day Orders

If an investor does not specify when an order will expire, the brokerage enters it as a day order. At the end of the trading day, it expires. If at that point, the brokerage has not executed the trade, it will have to be reentered the following day.

Good ‘Til Canceled (GTC)

A GTC order allows investors to put a time restriction on an order so that it lasts until the completion or cancellation of an order. Brokerage firms typically place a time limit on how long a GTC order can remain open.

Immediate or Cancel (IOC)

IOC orders allow investors to ask that the brokerage execute the buying or selling of stock immediately. It also allows for partial execution of the order. So if an investor wants to buy 1,000 shares of a company but it’s only possible to buy 500 shares immediately, these instructions will alert the broker to buy the shares available. If the broker can not fulfill the order, or any portion of the order, immediately, the broker will cancel it.

Fill-Or-Kill (FOK)

Unlike IOC orders, fill-or-kill orders do not permit partial execution. The brokerage must execute the order immediately and in its entirety, or cancel it.

All-Or-None (AON)

Similar to FOKs, all-or-none orders require the complete execution of the order. However, AONs do not require immediate execution, rather the order remains active until the broker executes or cancels it.

Which Order Types Is Best?

The type of order or special instructions you use when buying and selling stock depends on your goals with the transaction. Most beginner investors only need to execute market orders and perhaps limit orders.

Those trying to execute more complicated trades in shorter time frames, such as professional traders, may be more likely to use stop orders and special timing instructions.

Recommended: Buy Low, Sell High Strategy: Investor’s Guide

The Takeaway

Before using any of trade orders or timing instructions it’s critical to understand their function and to think carefully about how and whether they apply to your specific needs. Using the right order for your situation can potentially help you reduce risk and protect your portfolio, no matter how many stocks you own.

However, it’s possible to build a portfolio without any complicated stock orders. A great way to get started is to open an investment account on the SoFi Invest® platform. Once you open an account, you’ll get access to a team of financial advisors who can provide personal advice and help you build the best portfolio for you.

Photo credit: iStock/Alina Vasylieva


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Advance/Decline Line: Definition, Formula, Examples

Advance/Decline Line: Definition, Formula, Examples

The Advance/Decline line, or A/D line, is a technical stock market indicator used by traders to measure the overall health of the stock market. This measurement tells market participants whether there are more stocks rising or falling on a trading day, and whether a majority of stocks are pushing the market in either direction.

For traders who are looking for greater insight into market trend analysis, the A/D line may be a suitable indicator to help determine where the market is trending, how strong that trend is, and the direction the market could be going in the short-term.

What Is the Advance/Decline Line (A/D)?

The advance/decline line (A/D) is a market indicator that traders use during stock technical analysis to estimate the breadth, or the overall strength or weakness of the stock market. The A/D line monitors how many stocks are currently trading above or below the previous day’s close. Traders may follow these changes over time to try to forecast the direction of the market.

In a particular index, like the S&P 500, Nasdaq, or Dow Jones Industrial Average, stocks go up and down. But just because some stocks move in one direction, it doesn’t mean that all stocks move in that same direction. Sometimes it can be difficult for investors to discern whether the direction of the market is being influenced by larger stocks that hold more weight in an index, or by a majority of stocks that are pushing the markets in a particular direction.

The purpose of the A/D line is to see how it correlates with the price movement of the index it’s being compared to. Traders and investors can use the A/D line to see how many stocks are rising or declining to form an estimate on market direction.

Where Is the Advance/Decline Line on a Chart?

Market participants can find the advance/decline line above or below a stock index chart. Investors can reference the A/D line and compare it to the chart stock market indexes to better understand the strength of the market and to help gauge the direction of where the market might be headed.

Recommended: How to Read Stock Charts as a New Trader

Advance/Decline Line vs the Arms Index

The Arms Index — also known as the story-term trading index (TRIN) — is another technical analysis indicator used to estimate market sentiment and measure volatility. It’s a ratio between advancing and declining stocks versus the volume of stocks whose price increases or decreases. In other words, the TRIN compares advancing and declining stocks to their volume and shows whether the volume is flowing toward advancing or declining stocks.

If more volume is trending toward declining stocks, the TRIN for that day will be greater than one. If more A/D volume correlates with advancing stocks, then the TRIN will be below one for that day. A high TRIN reading could signal to traders that stock selling may be on the horizon. A TRIN reading below one could indicate a buying opportunity.

Traders may use the TRIN ratio as a short-term market gauge to measure overbought or oversold market levels, while the A/D line can be used to gauge longer term market sentiment by measuring the rise and fall of stock over a period of time.

Advance/Decline Line Formula

The A/D Line is calculated by taking the difference between the number of stocks that advance and the number of stocks that decline, compared to the prior close. This value is added to the previous day’s A/D Line value. If there are more declining stocks versus advancing stocks on a particular day, then traders will see the A/D line start to move downward. If there are more stocks that are advancing, the A/D number is going to be increasing. Here is the formula:

Advance/Decline Line = Number of advancing stocks – Number of declining stocks + Previous A/D Line value

Calculating the Advance/Decline Line (A/D)

The A/D line is a cumulative, daily calculation that is plotted each day so market participants can see the direction of where stocks are moving. When reading the A/D line, it’s important for traders to look at the direction of the line and not its value.

Traders may use the A/D line to help decide which trades to place next. For example, if the market shows more declining stocks than advancing stocks, this means a majority of stocks closed at a lesser value than their previous day close. As a result, traders may anticipate that the market will fall in the near term, and may choose to sell because the market trend is moving in a bearish direction.

Some indexes, like the S&P 500, are market-cap weighted, which means the larger companies hosted in the index influence the direction of the index. The A/D line allows investors to look at stocks on a level playing field. When a market rises, for example, the A/D line shows investors whether this rise was driven by a majority of stocks increasing or if the rise was caused by a select few of stocks that hold a larger weight in the index.

What Does the Advance/Decline Line Show?

The advance/decline line shows traders the degree of participation of stocks in a market that is either rising or falling and whether the majority of stocks are moving in a similar direction of the market.

The line is a representation of stocks that are ticking up or down cumulatively, adding stock movements each day to see the trend of advancing stocks vs. declining stocks. If there were more declining stocks than advancing stocks on a particular day, the A/D line would start to slope downward. If there were more advancing stocks than declining stocks on the day, then the A/D line would slope upwards.

Sometimes there might be a difference in direction between the index and the A/D line. This is called a divergence, and it can happen in one of two ways.

Bearish Divergence: Declining Line

If the index is on an upward trend but the A/D line has a negative slope, this is known as a bearish divergence. The increase in the index may be driven by some stocks, but this scenario signals to traders the market may reverse and trend downward in the short term.

Bullish Divergence: Rising Line

If the index is on a downward trend but the A/D line has a positive slope, this is called a bullish divergence. The index seems to be bearish, but the A/D line tells market participants there are more advancing than declining stocks during the period that the index is declining. This may signal a trend reversal in market prices and indicate the market has more strength than meets the eye.

Example of Using the A/D Line

Traders use the A/D line to compare it to the price movement of the index.

For example, when an index you’re monitoring is moving to new highs, you want to see the A/D line moving new highs to confirm the index’s direction.

If the index and the A/D line are both hitting new highs, the market is hitting a bullish trend. If the stock market reaches a new peak but the A/D line reaches a lower peak than the previous rally, that means fewer stocks are participating in a higher move and the rally could be coming to an end. This could suggest that the strength of the market is driven by a few names with larger market caps.

Is the A/D Line a Good Indicator?

The A/D line is considered a reputable and popular measurement for traders to gather reliable insight into the strength of a market trend. When the price of an asset changes, traders will want to know whether it’s best to buy or sell. With the A/D line, traders can estimate price trends of assets and potential reversals by reviewing the direction of the A/D line, which is considered to be a reasonably reliable indicator in predicting trends since it shows market participants how the market is behaving.

Pros of the A/D Line

Traders can find the A/D Line indicator either above or below a stock chart on a trading platform and may use it as a tool to try to time the market and potentially catch a particular stock price.

By gauging the direction of where markets are headed, the A/D Line can help traders forecast stock price movements on the upside or downside. This may help market participants position their trades favorably.

Cons of the A/D Line

It’s important for market participants to be careful to not rely on the A/D Line as their only market indicator. While the A/D Line offers insight into overall market direction, it may not be able to capture minor market changes.

The A/D Line does not capture price changes between trading gaps, or when a stock’s price moves higher or lower throughout the trading day even though there’s not much trading going on.

Another limitation is that even though the line shows the general direction of where the market is trending, either a positive or negative slope, the A/D line doesn’t show the precise percentage the stock moved.

How Investors Can Use the Advance/Decline Line

The A/D line is positioned against an index to help spot market trends and reversals. Traders who trade on the major indexes can use the A/D line to gauge overall market sentiment. Market participants can look at a historical A/D line to see how the market performed in different periods of time.

The Takeaway

The Advance/Decline Line is a tool used by traders and investors to forecast the direction of where the overall stock market is headed. The A/D Line is a well-known market indicator used to predict and confirm trends and forecast market reversals.

The A/D Line offers a great visual guide that may help traders make decisions on market strategies and positions in the short term. But while there are benefits of using this metric, it’s important for market participants to know the A/D line’s drawbacks as well.

Investors typically have many tools at their disposal when trading stocks, in order to be well informed. With a SoFi Invest® brokerage account, investors get access to stock market data, the latest investing news, and more — all at their fingertips — making it simple to trade stocks, exchange-traded funds (ETFs), cryptocurrency, and Initial Public Offerings (IPOs).

Find out how to get started with SoFi Invest.

Photo credit: iStock/utah778


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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bitcoin coin

Crypto Taxes (2022): How to Pay Taxes on Cryptocurrency

Over the past decade, cryptocurrency has slowly but surely become one of the hottest investments on the market. While many people were initially skeptical of crypto’s staying power and appeal, the rise of cryptos like Bitcoin has caught the attention of an increasing number of investors. But the IRS is also homing in on crypto taxes—and it’s important that investors know the basics regarding how to file and how to pay taxes on cryptocurrency.

Unfortunately, the IRS doesn’t exactly make it easy to understand how to calculate crypto investors’ tax liability, so a lot of the responsibility to get it right lands on the individual investor. (Looking for specific info on paying taxes on the crypto you have with SoFi Invest? Check out our support article on crypto tax prep.)

Of the 6 things to know before investing in crypto, the fact that crypto is taxed is right up there on the list. Read on to learn all you need to know about crypto taxes, including how to file and pay taxes on cryptocurrency.

How Do Cryptocurrency Taxes Work

There are many rules and regulations governing crypto, but the most basic thing to understand is that crypto investors are required to report their holdings and gains to the IRS when they file their taxes.

The IRS views cryptocurrencies (which it refers to as “virtual currencies”) as property. Not currency. And because of that, Uncle Sam wants to know what you’re holding, and many crypto holders will have tax liabilities associated with their holdings.

As they would with any other property they might own, crypto holders who purchased crypto like a stock or other asset will need to keep track of their crypto transactions. They’ll also need to report the value of their holdings (in U.S. dollars) on their tax filings.

One caveat: cryptocurrency received as a gift or a transaction, or that is mined, is instead treated as income by the IRS, and taxed accordingly.

Calculating Crypto Taxes

In many ways, investing in cryptocurrencies like Bitcoin is similar to investing in other assets, like stocks or bonds. Likewise, taxes are determined in similar ways.

For instance, when an investor buys and later sells a stock, they have a tax liability on their realized gains. They made money, or income, from the sale, and now owe taxes against that income. It’s a similar situation when it comes to tax on cryptocurrency.

Here are some situations in which crypto investors will generate a tax liability on their holdings:

•  Cryptocurrency is sold for cash: If you made a profit, that’s a capital gain. Depending on how long you held the crypto before selling, it would either be a short-term or long-term capital gain.
•  Cryptocurrency is used to purchase a good or service: Technically, here you are selling your crypto for dollars, then using the dollars to pay for a good or service. In the selling, capital gains taxes may apply.
•  Converting one cryptocurrency to another (exchanging cryptos): Converting or exchanging one crypto for another is selling the one to purchase the other. As a result, you may have to pay tax on the sale of the first crypto.
•  Being paid by an employer in cryptocurrency: Even if you get paid in crypto, it will get taxed as income.
•  Mining cryptocurrency: Proceeds from mining are typically taxed as income. It’s also possible for some miners to be taxed as a business.
•  Crypto is acquired via an “airdrop” or “hard fork”: In the event of a hard fork that results in new coins, those new coins are taxed as income.

Make no mistake about it, if a return is generated—positive or negative—or some type of income is realized from holdings, your crypto will need to be reported to the IRS. This is why it’s important to keep track of any and all crypto transactions.

Many crypto exchanges will keep track of an investor’s transaction history (like a brokerage would with stocks). But it’s not a bad idea to make individual notes, too. Or, if you’re not quite sure what to do, consult a professional.

Filing crypto taxes

When it comes to filing and paying taxes on cryptocurrency, here are the steps that should be taken.

1.Determine what, if anything, is owed. Reference the list of above to check if any of your transactions may have generated a tax liability. If so, it’s likely you’ll have a return to report to the IRS.
2.Record and report transactions. These will need to be reported on your tax return (your exchange can likely provide these in a document for you.) This is a paper trail for the IRS to follow.
3.File the correct forms with your tax return. The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses. Or, Form 1099-MISC , which is used to report income from rewards if the amount exceeds $600 for the year.

If you do owe taxes as a result of your crypto investing activity, you can pay the IRS directly . But since crypto taxes can be complicated, don’t be shy about reaching out to a professional for help.

How to Lower Crypto Tax Liability

When it comes to lowering your crypto tax liability, many of the same strategies that are used against traditional investments, like stocks, apply to crypto holdings. Here are a few examples:

Buy and Hold

The buy-and-hold strategy is simple: The longer an investor holds on to their crypto, the lower their potential tax bill when they do eventually exchange it for cash. If it was held for a year or longer, then long-term capital gains tax rates apply On the other hand, if the investor sells their crypto after holding it for less than a year, then short-term rates apply

Tax-loss Harvesting

If a loss is realized on a crypto holding, it can be used to offset the gains made on other holdings. This is called “tax-loss harvesting,” and is a common tactic used to lower tax liabilities on other investments. Investors can use tax-loss harvesting to offset as much as $3,000 in non-investment income.

One thing to keep in mind, though, is that if crypto is somehow stolen or lost, investors are out of luck. They won’t be able to apply the loss against their gains to lower their liability.

Charitable Donations

The IRS classifies crypto as property, and property donations are tax-deductible and not subject to capital gains taxes.

Here’s how this might work in an investor’s favor: If an investor bought a Bitcoin for $10,000 and it now has a value of $35,000, they would owe capital gains taxes on that $25,000 gain. By donating it, they can avoid those capital gains taxes and also take a deduction “generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year,” according to the IRS .

The Takeaway

Depending on the circumstances, crypto may be taxed as income, or as property.

Cryptocurrency taxes are very real, as are the consequences of ignoring tax liabilities. There are stiff penalties for people who are caught avoiding or otherwise failing to report investment income.

But by keeping track of your crypto holdings and transactions, managing your cryptocurrency tax liabilities shouldn’t be too difficult. As always, you can and should contact a professional if you feel like you’re in over your head.

And if you’re ready to start buying crypto, with SoFi, investors can purchase Bitcoin, Ethereum, and other cryptocurrencies.

Find out more about investing in crypto with SoFi.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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.

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SPAC IPO vs Traditional IPO: Pros and Cons of Investing in Each

While sometimes described as a “backdoor” to going public, SPACs have emerged as a major contender to the traditional IPO.

About $60.2 billion in SPACs debuted on the U.S. stock market in the first two months of 2021, far outpacing the $24.4 billion raised by IPOs in the same period, according to a report by the Securities Industry and Financial Markets Association (SIFMA).

In 2020, SPACs represented 97% of the total money raised in IPOs, the SIFMA data show. That compares with just 9.9% in the decade through 2019–a sign of how momentum behind this deal structure has intensified only recently.

While the popularity of SPACs is irrefutable, investors sitting at home may be wondering if they should buy into this trend and whether SPACs represent a better investment than regular IPO companies. Here’s a deep dive into how both SPAC IPOs and traditional IPOs work, as well as what to consider before investing in either.

SPACs vs IPOs

What Is a SPAC IPO?

SPACs, which stands for special purpose acquisition companies, are shell companies that raise money by listing shares on a stock exchange. They have no operating business–so no gadgets or widgets to sell, no services to offer–but instead go public with the sole intent of finding a private company to merge with.

Once a target company is found, the two businesses–the already public SPAC and the privately held company–merge. Through this merger, the private business goes public and gets listed on the stock exchange.

Here’s a step-by-step on how SPACs work with additional details:

A “sponsor”–typically industry professionals or executives–sets up a SPAC. They can pay $25,000 for a 20% stake in the company–what’s known as the “promote” or “founder’s shares.”

The SPAC lists on a stock exchange with a ticker symbol, raising money through the process. By convention, each SPAC share almost always sells for $10 apiece.

The SPAC hunts for a target business to buy. They usually have two years to complete this search. Otherwise, the money raised in the IPO gets returned to shareholders, typically with interest.

If a target business is found but more money is needed, more institutional investors may be brought in, in what’s known as a PIPE or private investment in public equity.

Stockholders have the right to vote on the proposed merger with the target company. If approved, the merger is completed, and the target company’s new ticker replaces the SPAC’s ticker.

Why Do Companies Go Public With SPACs?

In recent years, company executives–particularly ones from Silicon Valley leading unicorn companies–have complained about the traditional IPO process. Here are some reasons some CEOs have preferred the SPAC route to go public.

1. Faster timeline: A merger between a SPAC and its target can take between four to six months, whereas a traditional IPO can take 12 to 18 months.

2. Less expensive: In a traditional IPO, the cost of hiring the investment bankers or underwriters alone can be 4% to 7% of the IPO’s entire proceeds.

3. To avoid volatility: Traditional IPO valuations can be subject to the mood of the stock market at the moment. Meanwhile, the valuation of the private company in a SPAC deal is typically done in private negotiations, which might help avoid the ups and downs of public markets.

4. Regulatory oversight: The SPAC structure currently allows companies to market themselves using more forward-looking projections than traditional IPOs, which may be preferable to companies still in the earlier growth stage.

Benefits of SPACs

1. Warrants: When institutional investors buy SPAC shares, they technically get shares that are called “units.” Each unit typically includes a share priced at $10 and a warrant or a fraction of a warrant that can be exercised when the shares reach $11.50. Some brokerage firms have been allowing retail investors to purchase units as well.

2. Getting in early: SPACs allow retail investors to potentially get in early–so before a target company has been announced–and at just $10 a share.

3. Experienced sponsors: Prominent sponsors have been a key feature in the recent wave of SPACs. Such sponsors could be helpful, experienced advisors to younger companies and may be skilled at finding undervalued private businesses to bring to public markets.

4. New structures: Some criticism has been lobbed at the SPAC structure, and some deals have failed to materialize or handed investors lackluster returns. However, some of the more recent SPACs have attempted to address these issues with investor protections.

Risks of SPACs

Here’s what to know about SPACs when it comes to their risks:

1. Failure to find a target: While SPACs pledge to buy a target company when they go public, some fail to do so in the two years they have to find a business. Though investors would get their investment if the two years goes by without a deal, it would still be money that could’ve been invested elsewhere.

2. Dilution risk: While investors can buy shares of a SPAC at $10 when it goes public, there’s a risk that additional funding, such as the PIPE investment, to fund a deal could dilute their stake. Furthermore, warrants getting exercised also pose another dilution risk.

3. Greater regulation: The Securities and Exchange Commission (SEC) announced new accounting mandates in 2021 for SPACs, increasing oversight of the deal structure. Some market observers say greater regulation could be on the way.

4. Lackluster performance: Shares of SPACs have been volatile in 2021 as investors have been disappointed by the performance of some of these new companies.

IPO investing at your fingertips.

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What Is a Traditional IPO?

An initial public offering or IPO is the process of a private company offering shares for sale to the public. This is typically done through “listing” shares on a stock exchange, where investors can then buy and sell stakes in the company.

Historically, IPOs have been an important milestone in the American business landscape, signaling a company’s maturity and growth. After going public, companies typically face greater scrutiny both from regulators and investors on their performance and financials.

Here’s how a traditional IPO generally works:

A private company typically starts by hiring investment bankers. The process by which investment bankers handle and advise an IPO is called underwriting.

The underwriter helps the company file its S-1 prospectus with the SEC, a document that includes financial data, financial projections, descriptions on what the proceeds of the IPO will be used for, as well as potential risks to the deal.

If the IPO is approved, underwriters typically hold “roadshows”–events in which they present and pitch institutional investors on the company and IPO deal. If institutional investors are interested in buying, underwriters will allocate them a proportion of the shares.

Before listing day, stock exchange and ticker symbol are chosen by the company with the help of the underwriter. The underwriter will then buy shares from the company before transferring them to the public market.

Trading commences on the listing day. Oftentimes, there’s an IPO lock-up period, a stretch of time during which senior executives and early investors aren’t allowed to sell their shares in the open market.

Why Do Companies Go Public With Traditional IPOs?

Companies have traditionally gone through IPOs in order to raise additional money, provide an exit opportunity and greater liquidity for early stakeholders, and drum up more publicity.

Meanwhile, here are some reasons why a company may choose a traditional IPO as opposed to a SPAC IPO:

1. Sponsor promote: As mentioned, sponsors get a 20% stake of the company’s common equity in SPACs. For companies that don’t want to give up this stake, the traditional IPO may appear to be a better option.

2. Regulatory uncertainty: The SEC has already changed some of the regulatory requirements of SPACs and more changes could come. Meanwhile, for IPOs, the regulatory requirements have been in place for much longer and are designed to protect everyday investors.

3. Cooling enthusiasm: SPAC shares have had a mixed performance in 2021, given the regulatory uncertainty and disappointing performances by some companies. Some startups may want to avoid being grouped with such SPACs.

Benefits of Traditional IPOs

1. Get in early: Traditional IPOs can represent an opportunity to invest in a newly public company in its early stages.

2. Stable regulation: Regulations of traditional IPOs are still a tried and true model relative to oversight of SPACs, and they’re designed to protect retail investors.

Risks of Traditional IPOs

IPO investing is known to be risky. Some of the most famous examples of investors losing money from IPO investing come from the late 90s and early 2000s when the tech-bubble was raging. Dozens of companies that weren’t yet profitable and sometimes had questionable business models went public, and some individuals suffered losses from these investments.

1. New companies: Businesses that choose the traditional IPO route are still new companies that are untested in their business models and by public markets.

2. Stock volatility: While underwriters try to ensure a first-day pop in an IPO, shares of the company may experience volatility or decline in the weeks or months after listing. Also, a risky period tends to be after the lock-up expires. Early stakeholders selling shares could cause wild price swings in the stock.

Investing in SPACs vs Traditional IPOs: How to Choose

Here’s a run-down of key attributes for both groups when it comes to investing.

Ease

Buying IPO stocks and SPACs is relatively the same and easy for most investors. All that’s typically required is a brokerage account and the ticker symbol.

Additionally, the warrants that are part of SPAC units generally start trading 52 days after the IPO.

Prices

SPAC shares are typically priced at $10 apiece. The relatively low share price might make it more accessible to individual investors. However, IPOs are also rarely priced high and this is by design, since underwriters try to underprice shares so that they have an impressive “pop” on the first day.

Regulations

SPACs have had more regulatory flexibility when it comes to making forward-looking statements, making it important for investors to weigh the realistic business outlook of the businesses. Investors are also dealing with greater uncertainty with SPACs when it comes to future regulation down the road.

Meanwhile, the regulatory rules for traditional IPOs have been fairly well known and stable, and they’re designed to protect unsophisticated retail investors.

Taxes

The De-SPACing process is either when the merger with the target company is completed or if capital is returned to shareholders. Remember, SPACs generally have two years to find a target company to merge with. If it fails to merge, the SPAC is dissolved and investors get their investment money back plus interest.

How the investor is taxed depends on whether they incurred a gain or loss when the money is returned to them and how long the investment was held for.

Remember, in the US, when you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. Longer than a year, and it’s considered a long-term capital gain. Long-term capital gains tax rates are lower–either 0%, 15% or 20%–and depend on the investor’s income bracket.

When it comes to SPAC warrants, when an investor exercises them, the difference between the strike price and the price of the share is taxable income. This is typically taxed as ordinary income and so at a higher rate.

Fees

For the investor, trading costs should be relatively similar. Many brokerages these days also offer zero commission trading, meaning investors can buy and sell shares without incurring costs from the brokerage.

However, brokerages may charge higher commission fees for exercising or trading the warrants that are part of SPAC units. Investors can ask their brokerage firms about what these costs might be.

The Takeaway

Both SPAC IPOs and traditional IPOs are ways for investors to make bets on newer companies. In 2020, SPACs became a more prominent way for companies to go public and a popular investment vehicle. However, some of the enthusiasm cooled in 2021 amid lackluster performance by some businesses and regulatory warnings.

With both SPAC IPOs and traditional IPOs, investors can benefit from always doing their research: looking into the sponsors, key executives, business model, as well as the performance of the company and its industry. Both SPACs and traditional IPOs tend to be newer companies that have been less tested when it comes to their business model and public market reception, making them vulnerable to price volatility.

SoFi Invest allows eligible users to buy into companies before they begin trading on a stock exchange through the IPO Investing service. Investors can set up an Active Investing account to get access to IPO shares, company stocks, exchange-traded funds, as well as fractional shares.

Get started on SoFi Invest today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
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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