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Jun

2023

Guide to Market-on-open Orders

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

A market-on-open order is an order to be executed at the day’s opening price. Investors typically have until two minutes before the stock market opens at 9:30 am ET to submit a market-on-open order. MOO orders are used in the opening auction of a stock exchange.

While investors who subscribe to a more passive type of investing strategy may not incorporate MOO orders into their daily lives, they can be important to know about. You never know, after all, when you may want to place an order before trading commences.

What Is a Market-on-open (MOO) Order?

As noted, and as the name implies, market-on-open orders are trades that are executed as soon as the stock market begins trading for the day. They may hit the order book before then, but do not actually go through the trading process until the market is opened. Note, too, that MOO orders are only to be executed when the market opens — they are the opposite of market-on-close, or MOC orders.

These orders are executed at the opening price during the trading day, or immediately (or soon after) the bell rings opening the market on a given day.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

How Market-on-open Orders Work

There may be different rules for different stock exchanges, but generally, the stock market operates between 9:30 am ET and 4 pm ET, Monday through Friday. Trades placed outside of the hours are often called after-hours trades, and those trades may be placed as market-on-open orders, which means they will execute as soon as the market opens for the next trading day.

An investor might place a market-on-open order if they anticipate big price changes occurring during the next trading day, among other reasons.

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Different Order Types

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

Stock exchanges are marketplaces where securities such as stocks and ETFs are bought and sold. In the U.S., there are more than a dozen stock exchanges registered with the Securities and Exchange Commission (SEC), including the New York Stock Exchange and Nasdaq Stock Exchange.

Next, market order types. Order types can be put into one of two broad categories: market orders and limit orders.

Market Order

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

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

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

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

Limit Order

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

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

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

After-hours Trading

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

3 Reasons to Use a Market-On-Open Orders

There are several reasons to use a market-on-open order, including the following.

Trading Outside of Operating Hours

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

Anticipating Changes in Value

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

The News Cycle

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

It’s also important to know that stock exchanges tend to experience the most volume or trades at the open and right before the close. Even though the stock market is open from 9:30 am to 4:00 pm, many investors concentrate their trading at the beginning and near the end of the trading day in order to take advantage of all the liquidity, or ease of trading.

Examples of MOO Trade

Let’s look at some hypothetical examples of why an MOO order might be useful:

Example 1

Say that news breaks late in the evening regarding a large scandal within a company. The company’s stock has been trading lower in the after-hours market. An investor could look at this scenario and believe that the stock is going to continue to fall throughout the next trading day and into the foreseeable future. They enter an MOO order to sell their holding as soon as the market is open for trading.

Example 2

Or maybe a company reports quarterly earnings at 7 am on a trading day. The report is positive and the investor believes the stock will rise rapidly once the market opens. With an MOO order, the investor can buy shares at whatever the price may be at the open.

Example 3

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

Risks of MOO Orders

It is important to understand that if a MOO order is entered, the investor receives the opening price of the stock, which may be different from the price at the previous close.

Volatility at the Open

Considering the unpredictable and inherent volatility of the stock market, the price could be a little bit different — or it could be very different. Investors that use MOO orders to try and time the market may be sorely disappointed in their own ability to do so, but only because timing the market is exceedingly difficult.

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

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

Using Limit-on-open Orders

An alternative option is to use a limit-on-open order, which is like an MOO order, but it will only be filled at a predetermined price. Limit-on-market orders ensure that a transaction only goes through at a certain price point or “better.” As discussed, there are other types of limit orders out there, too, for given situations. For instance, there may be a context in which it’s best to use a stop loss order, rather than a limit-on-open or similar type of order.

The downside of doing a limit-on-market order is that there is a chance that the order doesn’t get filled.

Liquidity Issues

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

As mentioned, there tends to be greater liquidity at the beginning of the day and at the end, and investors will generally not have a problem trading the stocks of large companies, because they have many active investors and are very liquid.

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

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Creating a Market-on-open Order

Creating a market-on-open order is fairly simple, but may vary from trading platform to trading platform. Generally speaking, though, a trader or investor would select an option to execute a MOO when filling out the details of a trade they wish to make.

For instance, if you wanted to sell 5 shares of Company A, you’d dictate the quantity of stock you’re trying to sell, and then choose an order type — at this point, you’d select a market-on-open order from what is likely a list of choices. Again, the specifics will depend on the individual platform you’re using, but this is generally how a MOO is created.

Applying Your Investing Knowledge With SoFi

Market-on-open orders are submitted by investors when they want their order executed at the opening price and be part of the morning auction. An investor may use this order if they want to capture a stock’s price move up or down as soon as the trading day starts.

However, MOO orders don’t guarantee any price levels, so it may be risky for an investor if shares don’t move in the direction they were expecting. Unlike limit orders though, they are more likely to get executed.

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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is a market-on-open order?

Market-on-open (MOO) orders are stock trading orders made outside of normal market hours and fulfilled when the markets open. Trades execute as soon as the market opens.

What is market-on-open limit on open?

A limit-on-open order, or LOO, is a specific form of limit order that executes a trade to either buy or sell securities when the market opens, given certain conditions are met. Usually, those conditions concern a security’s value.

What is the difference between market-on-close and market-on-open?

As the name implies, market-on-close orders are executed when the market closes at 4 pm ET, Monday through Friday (excluding holidays). Conversely, market-on-open orders are executed when the market opens at 9:30 am ET, Monday through Friday.

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Jun

2023

How To Invest in International Stocks

By Colin Dodds | Growing Wealth, invest, Investing | No Comments

Investors can invest in international stocks, and there can be some benefits to doing so. But there are also considerations to keep in mind, too.

Investors can easily exhibit signs of “home country bias” — the tendency to favor stocks from one’s own country. But investing in international markets can be an important way to diversify and gain exposure to companies benefiting from rapid growth. And while American companies tend to pay higher dividends, investors may find attractive investing opportunities abroad.

Pros & Cons of Foreign Stocks

Investing in foreign stocks isn’t all that different from investing in domestic stocks, in that there may be advantages and disadvantages to both. Here’s a rundown of the pros and cons of investing globally.

Advantages of Investing in Foreign Companies

The U.S. stock market is the biggest in the world. But just because the U.S. market is the biggest, that doesn’t mean it’s the fastest growing or holds the best opportunities for all investors. Here are some of the benefits of investing in international companies:

• Valuations: A bull market in U.S. shares may leave companies richly valued relative to foreign companies.

• Economic Growth: The U.S. stock market is outsized relative to its economy. Buying overseas stocks can be a way to participate in the rapid growth that many regions could see as more of their population joins the middle class.

• Geographic Diversification: Foreign-stock investing allows investors to hedge some U.S. -specific risks by investing in the economies of other countries.

• Sector Diversification: The U.S. stock market can be over-concentrated in tech or tech-linked companies, with the 10 biggest stocks in the S&P 500 comprising an outsized percentage of the overall index.

Recommended: A Guide to Tech IPOs

Risks of Investing in Foreign Stocks

While there are many reasons to invest in international markets, these investments also come with risks that will surprise investors who are accustomed to domestic markets.

Volatile Growth: While overseas countries can post faster-paced growth than the U.S., that expansion can be jumpy, or particularly volatile.

Political or social instability: Depending on the country where they invest, an investor may have to grapple with the possibility of revolution, war or economic collapse.

Reporting Requirements: Not every market is rigorous in the transparency and reporting it requires from the companies on its public markets. That can make it hard to get the full story of what’s happening with an investment. Securities regulation as a whole varies from country to country.

Liquidity: International stocks trade in smaller markets, and certain markets may lack a large amount of buyers and sellers that could make the market efficient. That makes it more likely prices of assets will move with buy or sell orders.

Currency Risk: If a country’s currency sinks relative to the U.S. dollar, then a U.S. investor could lose a portion of the gains in any stocks that are traded in that currency. In the case of a foreign stock traded in the U.S., the currency of which that company does business will have a bearing on how U.S. investors view the company’s earnings.

Higher Fees: commissions and other trading costs related to international stocks are much higher than they are for domestic stocks. That translates into higher fees for a fund, or higher brokerage commissions if the investor buys and sells those stocks directly.

Recommended: What Are Liquid Assets?

Pros and Cons of Investing in Foreign Stocks
Pros	Cons
Valuations	Political and social instability
Economic growth	Volatility
Geographic diversification	Reporting requirements
Sector diversification	Liquidity
	Currency risk
	Higher fees

Finally, it’s worth noting that specific types of stocks may have additional associated risks. If you were looking to invest in an international IPO, for example, there may be more risks in the mix than if you were buying an established foreign stock.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How To Trade Foreign Stocks in the US

For investors ready to give international securities a shot, there are several ways to trade foreign stocks in the U.S.

International-Stock ETFs and Mutual Funds

Most investors who want more exposure to overseas markets will want to consider a mutual fund or an exchange-traded fund (ETF).

Investors based in the U.S. aren’t allowed to invest in mutual funds that are domiciled in other countries. That leaves U.S. -based funds that trade foreign securities. Those funds are usually categorized as either “global” or “international.”

They sound interchangeable, but they have one big difference. Global funds own securities from all over the world, including the U.S. International funds, on the other hand, invest only in securities from countries outside the U.S.

Both global and international mutual funds include actively managed funds, where a portfolio manager and a team of analysts pick the securities in the fund. They offer professional investing in unfamiliar lands, but often come with high expense ratios.

And there are also funds and ETFs that invest in indexes. The wide array of indexes and the explosion of ETFs allows investors to use these tools to invest in very specific regions, countries and sectors within those countries and regions.

An ETF can also allow investors to buy quick exposure to the broader international markets. For example, an index fund or ETF that tracks the MSCI World Index would give an investor access to equities in nearly two-dozen countries.

Recommended: Foreign Currency Bank Accounts

What Are American Depository Receipts (ADRs)?

Investing directly in overseas securities is where things get a little more complicated. One popular way to own international stocks is to buy American depository receipts (ADRs).

Many foreign companies use ADRs to raise capital in U.S. markets. Each ADR represents some number of underlying shares of the company’s stock, and trades throughout the day. Global Depository Receipts (GDRs) are another way to buy shares in overseas companies. But they are typically traded on the London Stock Exchange and Luxembourg Stock Exchange.

But there are also ways for investors to directly purchase foreign stocks. One is to open a global account with a domestic broker, and most large brokerages offer this option. If investors are targeting opportunities in a specific country, they can open an account with a local broker in that country.

3 Types of International Markets

International stocks as a broad category may be enough for an investor who sees them as a simple way to diversify their overall equity holdings. But different international investments have widely varying risk/reward profiles.

1. Investing in Developed Markets

The first category of countries to invest in are so-called “Developed Markets.” These are countries with industrial and post-industrial economies and mature capital markets, such as the U.K., Australia, and Japan. As a general rule, these offer similar growth and risk to the U.S.

2. Investing in Emerging Markets

The next category is “Emerging Markets,” which are still growing and modernizing to an industrial or information-driven economy. They include places like Thailand and South Korea. Investments in these markets may come with much bigger opportunities for growth. But they also carry the risk that comes with often-political climates, along with other risks unique to the countries they’re in.

3. Investing in Frontier Markets

The third category consists of “Frontier Markets,” which are also known as pre-emerging markets. Companies in these countries, such as Argentina, Bangladesh, and Kenya, come with even larger opportunities, but even more risk, including political and currency instability, as well as very little regulation.

Taxes on International Stock Investments

Just because you might be investing your money outside of the U.S. doesn’t mean that you’re going to be able to avoid taxes. In fact, there may be some tax disadvantages to investing in foreign stocks.

Investment income is subject to U.S. taxation, which includes dividends and capital gains. But there may also be taxes due on your investments that are levied by a company’s home country, too. You’ll need to look into the specifics of individual stocks and countries, but at the very least, anticipate paying investment taxes as you would on domestic stocks.

💡 Quick Tip: Did you know that investment losses aren’t necessarily bad news? Some losses can be used to offset gains, potentially reducing how much tax you owe. Learn more about investment taxes.

How Do You Buy International Stocks?

There are a few ways to buy international stocks, some as previously discussed. Perhaps the easiest or most simple way, for most investors, is to buy stocks directly from international stock exchanges — whether or not you can do that will depend on your individual brokerage or investment platform. Not all of them will allow investors to make direct trades.

You can also use ADRs, as previously covered, or buy international stock funds, like ETFs or mutual funds.

Investing With SoFi

International stocks offer diversification, unique opportunities, and can help investors hedge any U.S. -specific risk. But they also bring their own set of costs and risks. Investors interested in investing in foreign stocks can do so in a number of ways, but there are some pros and cons to consider.

The question of how much of an investor’s total assets should be allocated to international stocks depends on the investor’s expertise, risk tolerance and long-term goals. It may be best to speak with a financial professional for advice.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Can you directly invest in foreign stocks?

You can invest directly in foreign stocks by purchasing them through a brokerage or investment platform. Not all platforms will allow investors to access all foreign stock exchanges, but you can check the specifics to see what options are open to you.

Can US citizens invest in foreign stock markets?

Yes, U.S. citizens can invest in foreign stock markets. You may need to do some research to ensure that your chosen brokerage allows you to access a desired foreign stock market, but broadly speaking, U.S. citizens can invest in foreign markets.

How can you buy foreign stocks online?

You can buy foreign stocks online by purchasing them directly from stock exchanges using an investing platform or brokerage account, or by purchasing foreign stock funds, such as ETFs or mutual funds.

Jun

2023

Guide to Mega Cap Stocks

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Mega cap, or “megacap,” is a term that describes the largest publicly-traded companies, based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands.

Investing in mega cap stocks, along with companies that have a smaller market capitalization, can help build a diversified investment portfolio. Spreading investment dollars across different market caps may allow investors to minimize potential risks. But like any security, mega cap stocks have both pros and cons that investors should consider. Learning more about how they work and what sets them apart from other types of stocks can help you decide whether there’s a place for them in your portfolio.

Market Capitalization, Explained

Mega cap stocks sit at one end of the market capitalization spectrum, representing the very largest companies in the public markets. Market capitalization is a commonly used method for categorizing publicly-traded companies. In simple terms, market capitalization or market cap measures a company’s value, as determined by multiplying the current market price of a single share by the total number of shares outstanding.

For example, say a company’s stock is priced at $50 per share and it has 10 million shares outstanding. Following the formula of $50 x 10,000,000, the company would have a total market capitalization of $500 million.

Most often, companies are assigned to one of three categories, based on their market capitalization as follows:

• Small cap: Market value of $250 million to $2 billion

• Mid cap: Market value of $2 billion to $10 billion

• Large cap: Market value above $10 billion

While most companies fit into one of these three groups, some outliers exist on either end of the spectrum. The smallest of the small cap stocks are microcap stocks, while the largest companies are the mega caps.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Mega Cap Stock Definition

Mega cap stocks have a market capitalization that’s significantly beyond $10 billion required for classification of large cap stocks. Instead, these companies have market capitalizations in the hundreds of billions or even of $1 trillion or more.

There are a handful of companies with market caps of more than $1 trillion, and those companies only passed the trillion-dollar mark in recent years. That said, it’s likely more companies will become mega cap stocks in the years ahead.

10 Companies With the Largest Market Cap

As of June 2023, these are the ten companies with the largest market caps. Note, too, that there isn’t always a direct correlation between market cap and stock price!

1. Apple

Apple, which trades under the market ticker AAPL, has a market cap of $2.9 trillion, and shares trade at more than $185. Apple is a tech company that produces consumer tech goods and software, including the iPhone. Its latest quarterly report (Q2 2023) showed revenue of almost $95 billion.

2. Microsoft

Microsoft trades under the MSFT ticker, and has a market cap of more than $2.5 trillion. Microsoft, like Apple, is a large tech company that creates software and hardware for businesses and consumers. Microsoft shares trade for nearly $340, and its latest revenue numbers tallied nearly $53 billion for the quarter.

3. Alphabet

Yet another large tech company, specializing in software and ad sales, Alphabet (the parent company of Google) has a market cap of more than $1.57 trillion. Alphabet trades under the GOOG ticker (it has numerous share classes), and shares trade for around $124. Its latest quarterly revenue was almost $70 billion.

4. Amazon

Amazon is an ecommerce company that sells just about everything under the sun on its digital platform, as well as offering cloud services to businesses. Amazon trades under the AMZN ticker, and has a market cap of $1.22 trillion, and shares trade for more than $125. Amazon’s latest quarterly revenue was $127 billion.

5. NVIDIA

NVIDIA makes computer chips, and has a market cap of $1.07 trillion, with share prices of around $434. NVIDIA trades under the NVDA ticker, and its most recent quarterly revenue was $7.19 billion.

6. Tesla

Tesla, an electric car maker, is not a mega cap stock, but close. Its market cap is $857 billion, with share prices of more than $270. It trades under the ticker TSLA, and saw revenue of $23.3 billion during Q1 2023.

7. Berkshire Hathaway

Berkshire Hathaway is a conglomerate holding company, meaning that it is involved in many industries, including real estate and insurance. It has many stock classes, but trades under the ticker BRK.A, and is valued at more than $516,000 (its other shares trade for significantly less). Its market cap is nearly $743 billion, and its latest quarterly revenue was more than $85 billion.

8. Meta

Meta is the parent company of Facebook, and trades under the ticker META. Its market cap is $726 billion, and shares trade for more than $283. Revenue for the first quarter of 2023 was almost $28 billion.

9. Visa

Visa is a financial services company, which most recently brought in quarterly revenue of almost $31 billion. Visa trades under the ticker V, and has a market cap of more than $466 billion, with shares trading for more than $227.

10. UnitedHealth Group

UnitedHealth Group is a healthcare and insurance company with a market cap of $437 billion. Shares are trading for nearly $470, and its latest quarterly revenue numbers amounted to $336 billion.

3 Pros of Investing in Mega Cap Stocks

There are several good reasons to consider making mega cap stocks part of your asset allocation strategy.

1. Diversification

Investing across different sectors and market capitalizations spreads out risk, since economic ups and downs may affect smaller, mid-sized and larger companies differently.

2. Stability

Established mega cap companies are among the most stable in the economy and may be better able to withstand a market downturn compared to smaller or newer companies without cash reserves or a solid brand reputation.

3. Dividends

Some mega cap stocks pay dividends to investors since they don’t need to reinvest profits into growth. That can provide an additional stream of income or allow for faster portfolio growth if they’re reinvested.

Cons of Investing in Mega Cap Stocks

While there are some things that make mega cap companies attractive to investors, it’s important to consider the potential downsides:

Limited Upside

Since many mega caps have already done most of their growing, there may be limited space for their share prices to increase.

Perception vs Reality

Market capitalization measures the stock market’s perceived value of a stock, not its intrinsic value. So mega cap status alone shouldn’t be considered a reliable indicator of a company’s fundamentals or financial health.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How To Invest in Mega Caps

If you understand the investment risk and potential rewards that come with mega cap stocks and you’re interested in adding them to your portfolio, there are two ways to do it. You can choose to invest in individual mega cap stocks, or you can put money into an investment fund, such as a mutual fund or an exchange-traded fund (ETF) that holds mega caps.

You can also look at investing in a market index that can give your portfolio exposure to mega cap stocks.

Buying individual stocks allows you to pick and choose which mega caps you want to purchase. But this may require more of a hands-on approach as you’ll need to research individual companies. There are similarities and differences, in that regard, between investing in mega cap and investing in small cap stocks.

Investing in a thematic ETF focused on mega cap stocks may be a simpler way to diversify with larger companies. This allows you to have exposure to more mega cap stocks in your portfolio.

ETFs can be traded on an exchange, just like a stock, allowing for greater liquidity and flexibility than traditional mutual funds. Lower turnover ratios can make ETFs more tax-efficient than regular mutual funds. Depending on which mega cap ETF you choose, you may pay a much lower expense ratio than you would with traditional mutual funds.

Buying Stocks With SoFi

Mega cap stocks refers to stocks that have a market capitalization of more than $10 billion, and in some cases, more than $1 trillion. As of June 2023, there are only a handful of mega cap stocks out there, but several companies may become mega cap stocks in the subsequent years.

Mega cap stocks offer stability and the potential for dividend income, though they may have lower upside than smaller stocks that have more room to grow. The right role for mega cap stocks in your portfolio will depend on your investment goals, risk tolerance, and time horizon.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What are examples of mega caps?

Some examples of mega cap stocks include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN), the first two of which have market caps of more than $2 trillion.

How many mega cap stocks are there in the U.S.?

Mega cap stocks are stocks with share prices of vastly more than $10 billion, and as such, there are many on the market – dozens, in fact. But there are only three or four with market caps of more than $1 trillion.

What is the difference between a large-cap and mega cap?

While mega cap stocks are typically defined as having market caps of more than $10 billion (often more than $200 billion), large-cap stocks have market caps ranging from $2 billion to $10 billion.

Jun

2023

Investing in Food Stocks

By Emma Diehl | Growing Wealth, invest, Investing | Comments Off

Investing in food stocks can be a tasty endeavor. Learn about the types of food stocks, the associated risk, and how they can help build your investment portfolio.

Jun

2023

What Is a Charitable Gift Annuity and How Does it Work?

By Jamie Cattanach | Growing Wealth, invest, Investing | Comments Off

Funding your retirement is crucial—and donating money to worthy causes is a pretty great financial goal, too. When used correctly, a charitable gift annuity can help you accomplish both of those objectives at the same time.

What Is a Charitable Gift Annuity?

A charitable gift annuity allows a donor to make a contribution to a charity in exchange for a fixed monthly income for both the donor and an optional additional beneficiary later in life. This stream of payments can be a steady source of income in retirement, and is guaranteed through the annuity until all listed beneficiaries die.

However, there are important tax considerations to think through before purchasing a charitable gift annuity—or any annuity, for that matter. In this article, we’ll dive into the details on how charitable annuities work, what makes them different from other kinds of annuities, and how to determine whether or not one is right for you.

Understanding the Concept of Annuities

To fully understand charitable gift annuities, it’s important to have a background on annuities in general.

An annuity is a type of financial product used to create an income stream during retirement. It’s a contract—generally between the beneficiary and an insurance company or bank—that guarantees the buyer a set monthly payment in exchange for money the buyer pays in ahead of time.

Recommended: What is an Annuity, Exactly?

Depending on the type of annuity, the beneficiary might pay for it over time or in a lump sum. Sometimes, payments into the annuity can be made directly from an existing retirement account like an IRA or 401(k). Then, the annuity provider invests the money and makes payments back to the buyer once the retirement period starts. Payments might last for a set amount of time, like 10 years, or for the rest of the beneficiary’s life.

For the provider, an annuity is basically a wager against the buyer’s life expectancy. If the buyer passes away before the retirement savings they’ve paid into the annuity—along with any interest it’s earned in the meantime—has been paid back to them entirely, the annuity provider gets to keep the change.

With a charitable gift annuity, however, it works a little bit differently.

How Does a Charitable Gift Annuity Work?

With a charitable gift annuity, the contract is drawn up not between the buyer and an insurance company or bank (as with a standard annuity), but between a donor and a qualified charity. The donor makes a gift to the charity, some of which is used immediately for whatever needs the organization supports. However, part of the money is set aside in a reserve account, where it’s invested and will grow. Money from the reserve account—both principal and interest—are used to pay out the monthly stipend the beneficiary or beneficiaries receive.

Charitable annuity payments are made to the donor and beneficiary until both have passed away—at which point, the extra money is kept by the charity and used for charitable purposes.

In this way, the buyer of a charitable gift annuity can make a gift to a cause they support even after they’re gone, all while helping themselves create a secure and reliable retirement income in the meantime.

What are the Benefits of Charitable Gift Annuities?

Along with helping donors support a charity of their choosing both in and after life, charitable annuities have some other features that can make them attractive retirement vehicles for some people.

Non-Cash Donations

Many charitable gift annuities allow donors to contribute non-cash donations, including fixed income securities and investments—but also tangible items like art and real estate. Having this option means that donors might save money on taxes down the line. Annuity income is generally taxed as normal income at both the federal and state levels, but by donating physical securities, buyers of charitable gift annuities might pay less in capital gains taxes. (That said, regular income tax will still apply on any and all income received through the annuity.)

Payment Flexibility

Another nice thing about charitable gift annuities is the flexibility buyers have in receiving the payments when there are more than one beneficiary. Payments can either be structured to go to both beneficiaries at once, or to only kick in for the second beneficiary after the death of the first. In any case, any leftover funds will be donated to the charity when all beneficiaries have passed away.

Alternatives to Charitable Gift Annuities

Although charitable gift annuities can be a valuable tool, they may not be the right choice for every investor for a variety of reasons, including:

•   Gift annuities tend to have lower rates than most commercial annuity types, so they might not maximize your retirement income.
•   If you don’t have physical assets to donate, there may be more efficient ways to invest your cash.
•   Income streams from any type of annuity are usually still subject to federal and state income tax, unless they’ve been purchased using a Roth IRA or Roth 401(k), whose funds have already been taxed.

For investors who’d like more control over their investments, and fewer restrictions around when and how they can access the money, there are other places to put your retirement money.

One likely option is to take advantage of an employer-sponsored retirement account like a 401(k) at work. And almost anyone can bolster their retirement savings by investing in an IRA. Those under set income limits can invest in a Roth IRA, which will allow them to take tax-free distributions once they reach retirement age.

Even if you choose an alternative retirement option, you can continue to make donating to charities part of your financial lifestyle. It may even be possible to set aside money for charitable giving while on a tight budget.

The Takeaway

A charitable gift annuity is an annuity in which a donor contributes money to a charity, with the promise of getting regular payments in return later in life—for themselves and an optional beneficiary. Part of the initial payment, as well as any leftover funds, are donated to the participating charity after all the beneficiaries have died, making it a good way to secure retirement income while being charitable at the same time.

While a charitable annuity may be attractive to some investors, other types of retirement savings may allow an individual more nuanced control of their investments and more flexibility in the size and frequency of their withdrawals upon retirement.

There are many ways to invest for retirement, including opening a traditional, Roth, or SEP IRA with a SoFi Invest® online investing account. Members can choose between an active or automated account, and get access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how to plan for retirement with SoFi Invest.

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