Aug
08
2024
What Are Premium Checking Accounts?

What Is a Premium Checking Account?

By | Budgeting & Goals, Financial Independence, money | Comments Off on What Is a Premium Checking Account?

Checking accounts are one of the hubs of most people’s financial lives, and there are many options available. If you’re curious about premium checking accounts, which typically offer many extra perks, you’re in the right place.

In this guide, you’ll learn about some of the pros of premium checking accounts, such as higher interest rates and ATM-fee reimbursements. You’ll also find out about the potential downsides, like the need to maintain a high balance. Read on for details, so you can decide if a premium checking account is right for you.

Key Points

•   Premium checking accounts offer benefits such as higher interest rates, waived fees, and dedicated customer service, appealing to those who maintain high balances.

•   These accounts usually require account holders to meet minimum balance requirements, often ranging from $10,000 to $15,000, to avoid fees or earn interest.

•   Potential downsides include lower interest rates compared to savings accounts and tiered benefits that necessitate maintaining even higher balances for maximum rewards.

•   Many financial institutions allow customers to meet balance requirements across multiple accounts, facilitating easier qualification for premium checking accounts.

•   Evaluating whether a premium checking account aligns with individual financial goals is crucial, as alternatives like high-yield savings accounts may provide similar benefits without high balance demands.

What Does Premium Checking Mean?

What is a premium checking account? It’s a type of checking account in which account holders are rewarded for meeting high balance requirements or paying higher monthly fees. These rewards may include higher interest rates, fee-free ATMs, free checks, and more.

In some cases, a bank may offer you these perks if you open multiple types of accounts at the same institution — an example would be having both premium checking and savings accounts at a bank. Another common model for premium checking accounts is that the more you keep on deposit, the more incentives you may receive.

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What Are the Benefits of a Premium Checking Account?

Those who qualify for a premium checking account may be rewarded with the following benefits:

•   Lower fees for other financial products within the same financial institution

•   Dedicated customer service

•   Higher APYs, or annual percentage yields

•   Free or low-cost wire transfers

•   ATM fee reimbursements

•   Free checks.

These can be attractive ways to encourage customer loyalty, as many financial institutions work to find new ways to enhance their clients’ experience.

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Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.50% APY on your cash!

Pros and Cons of a Premium Bank Account

Opening a premium bank account might be valuable if you can take advantage of all the benefits offered. That being said, there are some downsides, too. Meeting certain requirements can make this type of account inaccessible to some. Let’s take a closer look at the benefits and the downsides.

Pros

Here are the potential upsides of premium checking accounts:

•   Higher APYs: Premium checking accounts typically come with higher APYs compared to basic checking accounts (which may not accrue any interest at all). That enhanced interest rate means your money earns more money.

•   Waived or lowered fees: In most cases, premium checking accounts will waive fees such as those for out-of-network ATMs, money orders, cashier’s checks, and wire transfers. Depending on the bank and what other accounts you have with them, you may even get lowered or waived fees on exchange rates for ATM withdrawals outside the U.S.

•   Discounted rates on other financial products: It’ll depend on your relationship with the bank (and what other accounts you have in addition to a premium checking account), you could receive lower rates for personal loans or mortgages compared to other customers.

•   Higher transaction limits: You may be able to make larger daily ATM withdrawals, transfers, or debit card purchases.

Cons

Next, consider the possible downsides of a premium checking account:

•   Rates may not be as high as you think: Although you could receive a higher interest rate compared to other types of checking accounts, it may not be as high as what you could get with savings or money market accounts.

•   More stringent requirements: You’ll typically need to maintain a higher minimum balance in your account in order to avoid monthly maintenance fees or to earn interest. For instance, many banks require anywhere from $10,000 to $15,000 or more in your premium checking account. The good news is that the balance requirements may be the total across all your accounts with the same financial institution.

•   Benefits may be tiered: While it varies from bank to bank, you may have to “level up” to an even higher minimum balance to access the best interest rates and other perks.

How Can I Qualify for a Premium Checking Account?

In most cases, all you need to do is to have a minimum amount on deposit in order to open a premium checking account. Some may even require you to open other financial products or allow you to meet the minimum deposit requirements across a number of qualifying accounts.

Some major banks, like Chase and Bank of America, will allow you to meet minimum deposit requirements across different accounts as long as they’re linked.

Recommended: How to Automate Your Personal Finances

Additional Features of a Premium Checking Account

You may want to consider whether having that much money in a checking account is a worthwhile move for you. Consider the following points:

•   Is earning interest a priority for you? If you’re after a checking account that earns a higher amount in interest, a premium checking account may be for you. Keep in mind though that if you may not earn as much as you think you will. For instance, if a bank currently offers a 0.04% APY, on a $50,000 balance, you’re only earning $20 per year or so (how often interest compounds will make somewhat of a difference).

•   How often do you use ATMs? Many premium checking accounts offer more ATM transactions and even waive fees for third-party ATM fees. For those who use ATMs frequently, especially out-of-network ATMs, this perk may not be worth it.

•   Do these perks sync up with your financial goals? Premium checking can be part of a deeper relationship with your bank (often called relationship banking) that offers holistic support for your finances. This includes benefits like discounted rates on other financial products — say, a home loan. If you’re willing to keep all your finances at one bank, a premium checking account might be a good fit and open other doors for you.

Are Premium Checking Accounts Worth It?

To decide if a premium checking account is right for you, consider these points:

•   It can be a smart idea to compare premium accounts to standard checking accounts. You may be able to get many of the same benefits, such as free checks or equivalent interest rates, without stashing as much cash as premium accounts require.

•   Getting a high-yield savings account could be a good option if you want to earn a higher interest rate but can’t meet the large minimum balance criteria required of premium checking accounts.

•   If you want to keep all your banking (including investments and loans, for instance) with the same financial institution and can maintain a high balance across your qualifying accounts, premium checking could be well worth it. This is especially true if you’ll use all the perks like free checks and ATM reimbursements.

By thinking about your financial goals and how you like to bank, you may decide that premium checking is the right move for you.

The Takeaway

Premium checking accounts can be a valuable option for some bank customers. If you can maintain the high balance and can use the rewards offered, it may be a good fit.

For others, a high-yield checking without the high minimum requirements might be a better option. It’s up to you to decide what fits your financial style best.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

FAQ

Is a premium checking account worth it?

A premium checking account may be worth it depending on whether you can afford to meet the higher than usual minimum balance amount and whether you’ll be able to take advantage of all the perks. If you can, it may be a good fit.

What are the benefits of a premium bank account?

Some of the key benefits of a premium bank account is a higher interest rate, waived out-of-network ATM fees, discounted rates on loan products, and overdraft protection. Some may even offer free financial and investing advice.

What does a premium bank account mean?

A premium bank account is a type of account offering extra perks once you meet a minimum balance requirement.

Photo credit: iStock/Charday Penn

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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

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

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Aug
08
2024
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Guide to Brokerage Accounts

By | Growing Wealth, invest, Investing | No Comments

Key Points

•   A brokerage account is an investment account that allows individuals to buy, sell, or trade various financial securities, including stocks and bonds.

•   Different types of brokerage firms offer varying levels of service, including full-service, discount, and online brokers, each with distinct fees and features.

•   Investing through a brokerage account has no contribution limits or withdrawal restrictions, but capital gains from profits are subject to taxation.

•   Four main types of brokerage accounts include cash accounts, margin accounts, joint accounts, and discretionary accounts, each serving different investment needs.

•   Opening a brokerage account typically requires personal information, an initial deposit, and agreement to specific terms, with options for funding through various methods.

What Is a Brokerage Account?

A brokerage account is a type of investment account typically opened with a brokerage firm. Brokerage accounts allow owners to invest their money, and buy, sell, or trade stocks, bonds, and other types of financial securities. There are different types of brokerage accounts, and they’re offered by a range of financial firms.

For prospective investors, knowing what a brokerage account is and how they work is important. For seasoned investors, learning even more about them can help deepen their knowledge, too.

How Does a Brokerage Account Work?

As noted, brokerage accounts allow owners to invest in stocks and other financial securities. They’re offered by different types of financial firms, too. In fact, there are many brokerage firms that investors can choose from. While all offer brokerage accounts, they usually come with different fees and services:

•   A full-service brokerage firm usually provides a variety of financial services, including allowing you to trade securities. Full-service firms will sometimes provide financial advice and automated investing to customers.

•   A discount brokerage firm doesn’t usually provide any additional financial consulting or planning services. Thanks to their pared down services, a discount brokerage firm often offers lower fees than a full-service firm.

•   Online brokerage firms provide brokerage accounts via the internet, although some also have brick and mortar locations. Online brokers often offer the lowest fees and give investors freedom to trade online with ease. They also tend to make information and research available to consumers.

Opening a brokerage account generally starts out as a similar experience to opening any other type of cash account. Consumers can simply start an account either online or in person.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Some brokerage firms require investors to use cash to open their accounts and to have enough funding in their account to cover the cost of stocks or bonds, as well as any commission fees. There are some however, that don’t require any initial deposit.

In order to make their first investment however, consumers usually need to deposit money. They can do this by moving money from another account, such as from their checking or savings accounts. From then on, the brokerage firm can help individuals execute buy or sell orders on stocks, exchange-traded funds (ETFs), bonds, or mutual funds.

Unlike a retirement account, there are generally no restrictions on how much money a consumer can put in. There are also typically no restrictions on when individuals can withdraw their cash from brokerage accounts. Investors do need to claim any profits — or “capital gains” — as taxable income.

Here’s a closer look at how brokerage firms differ from other types of money accounts.

Brokerage Accounts vs Retirement Accounts

The primary difference between a retirement account and a brokerage account is if there’s any tax advantage at play.

For stocks, bonds, exchange traded funds, mutual funds, options etc, brokerage account holders are liable to pay capital gains taxes on most of their profits from trading these securities. That’s why brokerage accounts are also known in the industry as “taxable accounts.”

Retirement accounts are set up with money that has some kind of tax advantage and can be used to buy securities. For example, 401(k)s are set up by an employer and funded with money that comes from an employee’s paycheck before taxes and can be matched by an employer.

These accounts, which also include traditional and Roth IRAs, have specific rules about the amount that can be contributed and when money can be withdrawn. Meanwhile, with brokerage accounts, there are few limits on funding or withdrawals.

Brokerage Accounts vs Checking Accounts

Brokerage accounts and checking accounts have one important thing in common: they can both have cash in them. Sometimes brokerage accounts will “sweep” your cash into a money market fund managed by that same brokerage, allowing you to earn interest. Meanwhile, in a traditional bank checking account, you don’t earn any interest but you do have easy access to your cash.

An important distinction between brokerage and checking accounts is the level of protection you get from them. A checking account offered by a bank will typically have insurance provided by the Federal Deposit Insurance Corporation (FDIC), which protects the first $250,000 deposited at a bank that has a charter from the FDIC. This means that $250,000 deposited can be withdrawn even if the bank itself goes out of business.

Brokerage accounts, on the other hand, typically have insurance provided by the Securities Investors Protection Corporation (SPIC), which unlike the FDIC, is not a government agency. What SIPC insurance does is protect the custody of stocks, bonds, and other securities as well as cash in a brokerage account, not their value.

This means that if a brokerage fails, the SIPC insurance will protect cash deposited in a brokerage account up to $250,000 and securities and cash combined up to $500,000.

This simply means you get your cash deposited in the account and the securities back, not that you have insurance from the value of those securities going down.

Brokerage Accounts vs Checking and Savings Accounts

Cash management accounts are something of a hybrid between checking and brokerage accounts.

They are not offered by banks but can, on a case by case basis, partner with banks and other financial service providers to give clients access to ATMs and even FDIC insurance.

Pros and Cons of Opening a Brokerage Account

Brokerage accounts can be powerful financial tools, but they can have their advantages and drawbacks, too.

Pros of Brokerage Accounts

The most obvious advantage of a brokerage account is that it allows its owner to trade financial securities and invest their money. They tend to have a high degree of liquidity, too, meaning that it’s relatively easy to buy and sell securities. There are also no general requirements for contributions or withdrawals.

Cons of Brokerage Accounts

Cons of brokerage accounts include the fact that they can’t be used for traditional transactions, like, say, a checking account. While your account may have a cash balance, you can’t use it to purchase a soda from the corner store.

Further, getting your money in and out of a brokerage account may take some time. There are often fraud checks and other elements at play when transacting a cash balance in or out of an account, and it may take a couple of days. There are also no tax advantages — something that may be present for certain retirement accounts.

Pros and Cons of Brokerage Accounts
Pros

 Cons
Ability to trade securities Can’t be used for transactions
High liquidity Slow transaction times
No limits on contributions and withdrawals No tax advantages

A couple of other things that may be worth considering, especially if you’re interested in investing for beginners.

Before you consider opening a brokerage account, make sure you have sufficient money set aside for an emergency fund. Common financial advice recommends setting aside three to 12 times your streamlined monthly expenses. It’s also good practice to contribute to your 401(k) or IRA before opening a brokerage account.

If you have an emergency fund stashed away and are making regular contributions to a retirement account, think about what types of assets you plan on investing in. A brokerage account would only be required if you plan to buy stocks, bonds, or other securities. If you only plan on investing in mutual funds, you might not need a brokerage account.

4 Types of Brokerage Accounts

There are also a few distinct types of brokerage accounts, though they all work in a similar fashion — trading securities, after all, is what brokers do. They are cash brokerage accounts, margin accounts, joint brokerage accounts, and discretionary accounts.

1. Cash Brokerage Accounts

A cash brokerage account is the “vanilla” option. If you open a cash brokerage account, you deposit money and start trading securities.

2. Margin Brokerage Accounts

A margin brokerage account may require approval from a brokerage. These types of accounts let owners use “margin” when trading. That means that they can effectively borrow money to trade with from the brokerage. These obviously come with a higher degree of risk, too.

3. Joint Brokerage Accounts

Joint brokerage accounts are more or less cash brokerage accounts that are opened by more than one person. It’s like a joint bank account, in many respects.

4. Discretionary Accounts

Another type of account that some brokerage firms offer is a discretionary account. This type of brokerage account, sometimes referred to as a managed account, allows an authorized broker to make trades on behalf of the client. The client usually must sign a discretionary disclosure with the broker. Many brokerage firms require account minimums for this type of account.

💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

How To Open a Brokerage Account

Most firms allow you to set up a new account online. You’ll need to provide basic personal information, and most firms will ask about your net worth, your employment status, what assets you currently own, and what you have defined as your investment goals.

Requirements for Opening a Brokerage Account

There may be some requirements for opening a brokerage account.

Initial Investments

Depending on the type of brokerage account you are opening, most firms let you open an account with about $1,000 but some require an initial investment of $2,500 or more.

Account Minimums

You will need to have enough money in your account to pay for one or more shares of the stock you want to buy plus the commission fee (if applicable). Each account and brokerage firm is different, so check with your preferred company to determine what the account minimums are.

Agreeing to Terms and Conditions

You’ll need to play by the rules, and a brokerage firm will likely have you agree to certain terms and conditions for using your account. That may include agreeing to certain fee schedules, too.

Funding a Brokerage Account

There are at least five ways to transfer money from your bank account into your brokerage account:

•   Electronic funds or wire transfers involve moving money electronically from one’s bank account into another account. Individuals typically have to go to their bank and fill out the required information and direct where the money should be transferred.

•   Deposit a check: Customers can withdraw money via a paper check from their checking, savings, or another existing brokerage account. They can then mail the check to the brokerage account they’d like to deposit the funds at.

•   Transfer an existing investment from another broker. Customers can typically transfer funds between brokerage accounts through an automated process known as the Automated Customer Account Transfer Service (ACATS). Customers usually fill out a form. Transfers involve assets such as cash, stocks, bonds, or listed options.

•   Deposit an existing paper stock certificate: Paper stock certificates are much rarer today in the age of electronic trading, but if a customer does have one, they can mail it to their broker to be deposited. Inheriting a certificate may require additional verification and paperwork, and in general, mailing with insurance is recommended.

Brokerage Account Taxes

Another important thing to remember is that there are taxes associated with brokerage accounts. Specifically, any interest or dividends earned from your brokerage account will be taxable.

If you sell an investment and earn a profit, you will have to pay a capital gains tax. However, if you sell a stock at a loss, that becomes a capital loss and you could get a tax break from that sale which could lower your taxable income.

Investing with SoFi

Brokerage accounts allow owners to buy and sell investments and financial securities. They are offered by a number of financial institutions, and come in a few different types. By and large, though, they’re a very popular choice for investors looking to get their money in the markets.

They do have their pros and cons and associated risks, however. It may be beneficial to speak with a financial professional to learn more about how you can use a brokerage account to your advantage in pursuit of your financial goals.

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

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

How do I open a brokerage account?

Most brokerage firms allow prospective customers to open an account online or in person. Opening a brokerage account generally requires some personal information related to identity and financials, and some money to make an initial deposit.

Is there a minimum deposit to open a brokerage account?

Different brokerage firms will have different rules regarding minimum deposits, but there are many that don’t require a minimum deposit. Again, it’ll depend on the specific firm.

Do brokerage accounts have fees?

Yes, most brokerage accounts have some sort of associated fees. There may be commission fees involved, though they’re less common today than they once were, but there can be other types of fees to be aware of, too.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Aug
08
2024
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Explaining the Shareholder Voting Process

By | Growing Wealth, Investing | No Comments

Shareholder voting rights allow certain stockholders to vote on issues impacting company performance, including mergers and acquisitions, dividend payouts, new securities, and who is elected to the board of directors.

Investors who own shares of common stock of a company usually have shareholder voting rights. Investors with common stock are generally allowed one vote per share they own. Thus, an investor who owns 1,000 shares of stock may have 1,000 votes to cast.

If the idea of potentially participating in a company’s decision-making process is appealing to you, keep reading to learn more about the voting rights of equity shareholders and how they work.

Key Points

•   Shareholder voting rights enable stockholders to participate in key decisions affecting company performance, such as electing directors and approving mergers.

•   Common stockholders typically receive one vote per share owned, while preferred stockholders usually do not have voting rights but have priority for dividends.

•   Voting processes vary; shareholders can vote in person, by mail, via phone, or online, depending on company policies and ownership type.

•   Proxy voting allows shareholders to authorize someone else to vote on their behalf, often necessary for those unable to attend meetings.

•   The record date determines eligibility to vote at the annual meeting, and companies must notify shareholders in advance about meeting details and voting issues.

What Are Stockholder Voting Rights?

Stockholder voting rights are the privileges granted to shareholders of a company to vote on matters that affect the company, such as the election of directors and the approval of major corporate actions, and to have a say in how the company is run.

First, it helps to distinguish between common and preferred stock. As noted above, investors who own shares of common stock are typically granted voting rights, usually at one vote per share.

Meanwhile, investors with preferred stock generally can’t vote on matters relating to the company’s governance and policies, but these investors are given preferred treatment in terms of dividend payouts. In the case of bankruptcy, preferred shareholders are usually paid before common stockholders.

There’s another wrinkle when understanding the voting rights of equity shareholders. In a privately held company, the corporation itself (along with state corporation laws) oversees and can restrict shareholder voting rights. In a publicly traded company, shareholder voting follows company rules but must also adhere to the Securities and Exchange Commission (SEC) guidelines.

And while investors who own common stock generally have shareholder voting rights, only “investors of record” are allowed to vote at the annual company meeting. “Of record” status refers to the process whereby investors are added to company records, which isn’t determined simply by which type of shares they own but by when they bought the shares. Investors must buy their shares before the record date to be added to the company record before a meeting — and thereby allowed to vote.

What Do Shareholders Vote On?

Shareholders vote on matters such as the election of the board of directors, the approval of significant corporate actions, like mergers and acquisitions, and the adoption of changes to the company’s bylaws.

The voting rights of equity shareholders don’t extend to issues concerning day-to-day operations or management issues, like hiring and firing, budget allocation, product development, etc. The management team of a company makes these decisions throughout the year.

Nonetheless, the issues shareholders vote on can significantly impact a company’s bottom line, strategy, and overall profitability.

Given the one vote per share rule, the more shares an investor owns, the more influence they can exert if they actively exercise their voting rights — which is why many large investors pay close attention to critical issues where their vote might make a difference. Many shareholder activists use the voting process to exert influence over their investments.

Shareholders are generally alerted to the annual meeting via mail, including a package that summarizes the main issues to be addressed at the company meeting. These can include topics like:

•   Electing directors to the board

•   Approving a merger or acquisition

•   Approving a stock compensation plan

•   Executive salaries and benefits

•   Major shifts in company goals

•   Fundamental corporate structure changes

•   Approving stock splits

•   Dividend payments

As you’re considering which stocks to invest in, you may want to look into how shareholder voting works with each company. For instance, some companies don’t allow shareholders to call special meetings, and a supermajority vote is required to change some of the company’s bylaws.

What Happens at a Shareholder Meeting?

If you choose to attend the annual general meeting of a company in which you own stock, this is typically the only time that the company directors and shareholders will interact.

In certain states, public and private companies hold annual meetings, but the rules about holding these meetings are stricter for public companies.

The agenda will probably be similar to the following:

Notice of Meeting

The voting rights of equity shareholders allow those investors to get advance notice of what will be covered at the annual meeting. Each company has specific rules about how far in advance they must notify shareholders of the meeting, but in most cases, the company sends physical mailers with pertinent information.

The company must also file a statement with the SEC outlining the date, time, and location of the next meeting. This statement will also include the topics to be discussed and voted on at the meeting.

Minutes of Previous Meeting

Notes from what happened at the previous general meeting are presented and approved.

Presentation of Financial Statements

The company will present current financial statements to the shareholders.

Ratification of Director Actions

Decisions made by the board of directors over the previous year are presented and approved or denied by the shareholders. This can include the payment of dividends according to a set dividend payment schedule.

Speeches

Certain companies will present an overall vision of the company’s goals for the upcoming year or other information relevant to shareholders.

Open Floor for Shareholder Questions

Typically there will be a time when shareholders are allowed to ask questions.

Election of the Board of Directors and Other Votes

Shareholders vote on who will be members of the company’s board of directors for the upcoming year. Voting on other issues will also take place.

Extraordinary Matters

If a special meeting is called during the year, which is different from the annual general meeting, other topics will be discussed and voted on. These could include the removal of an executive, an urgent legal matter, or another issue that requires immediate attention.

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How Does the Voting Process Work?

There are a few different ways you can exercise your shareholder voting rights. These differ depending on the company and what type of owner you are. As mentioned, certain companies may give shareholders one vote per share of stock they own, while others give each shareholder one vote in total.

If you get one vote per share, this means you have a larger say in decision-making at the corporate level if you are more heavily invested in the company.

However, for voting to commence, the meeting must have a quorum. Reaching a quorum refers to the minimum number of shareholders that must be present or represented at a shareholder meeting for the meeting to be valid and for votes to be counted. Usually, this is a simple majority of share votes.

Registered owners hold shares directly with the company, while beneficial owners hold shares indirectly through a bank or broker. Most U.S. investors are beneficial owners. As either type of owner, you should receive instructions on how to vote in each of the following ways:

In Person

Companies typically hold annual meetings that shareholders are allowed to attend. They can also hold special meetings throughout the year.

Shareholders receive materials in the mail or via e-mail containing details of upcoming meetings. Most companies hold their annual meetings between March and June, within six months after the close of the previous fiscal year.

By Mail

You can exercise your stock voting rights by mail if you are a registered owner. You will receive instructions on filling out a proxy card so that a delegate can vote on your behalf. You will receive a voting instruction form if you are a beneficial owner.

By Phone

The materials you receive in the mail might include a phone number and directions to vote over the phone.

Over the Internet

Some companies are now providing instructions for shareholders to vote online. This can be a more convenient way to complete shareholder voting.

What Are Proxy Requirements?

Many shareholders live too far away and are too busy to attend company meetings and vote in person. For this reason, shareholders may vote by proxy, meaning they authorize someone to vote on their behalf.

You may be familiar with the estate planning term “health care proxy” or “financial proxy” — a designation allowing an agent to make decisions on behalf of someone else. It’s similar in that a formal power of attorney or other permission must be granted to allow a proxy vote.

As a shareholder, you will receive a proxy ballot in the mail containing information about the issues on which you can vote.

The proxy statement also may include information about the company’s management and the qualifications of any potential board members, the agenda for the meeting, and the company’s largest shareholders. These statements are filed with the SEC annually before the general meeting.

If you own stocks through a mutual fund, the investment managers can also cast proxy votes on your behalf.

The proxy voter is often someone on the company’s management team. Even if you choose to vote by proxy, there are some issues you can still directly vote for or against, such as the election of directors and the chief executive officer’s salary.

How Do You Know When to Vote?

Part of understanding how the voting rights of equity shareholders work hinges on knowing when you can vote. If a company is preparing to hold a vote, it sets what is known as a “record date.” As noted above, if you own shares of that company on the record date, you have a right to vote. The company will send all eligible voters one of the following three notices:

•   A physical notice stating that proxy materials are available for viewing online,

•   A package containing a voting instruction form or proxy card, as well as an annual report, or

•   A package containing an information statement and annual report but no proxy card.

When deciding whether to invest in a stock, you may want to look for any news regarding previous shareholder meetings. You can find out more about what shareholders have voted on in the past and how shareholder voting works with that company to make the best choices about how you might decide to cast your votes.

The Takeaway

The voting rights of equity shareholders can be summed up pretty simply: Investors of record who own shares of common stock are generally entitled to one vote per share, which they can cast at the annual shareholder meeting to shape company policy — and potentially profitability.

Now that you know more about this compelling aspect of being a stockholder, you might be inclined to start investing in shares in a company you want to be more involved with. Fortunately, SoFi can help. With a SoFi Invest® online brokerage account, you can trade stocks, ETFs, fractional shares, and more with no commissions. Plus, if you have questions, the SoFi team can offer complimentary, personalized investment advice.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

Which type of stock comes with voting rights?

Most publicly traded companies issue two types of stock: common stock and preferred stock. Common stock typically comes with voting rights, while preferred stock does not.

What is the difference between registered and beneficial owners when voting on corporate matters?

A registered owner is a person or entity whose name is recorded on the company’s books as the owner of a particular share of stock. This person or entity has the right to vote on corporate matters and to receive dividends and other distributions from the company. On the other hand, a beneficial owner is a person or entity that ultimately owns or controls the stock, even though their name may not be recorded on the company’s books. Beneficial owners may have acquired their ownership interest in the stock through a brokerage account or a trust, for example.

How do shareholders vote for the board of directors?

Shareholders typically vote for the board of directors at the annual meeting of shareholders. In most cases, shareholders can vote in person at the meeting or by proxy, which allows them to appoint someone else to vote on their behalf. Some companies may also allow shareholders to vote by mail or online.

What is the impact of voting rights?

Voting rights are an important aspect of ownership in a publicly traded company. As a shareholder, your voting rights give you the ability to influence the company’s direction and hold its management accountable.

What is e-voting in shares?

E-voting, or electronic voting, is a process that allows shareholders to cast their votes electronically rather than in person or by mail. E-voting is usually done through an online platform provided by the company or a third-party service provider.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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08
2024

How to Calculate Stock Profit

By | Growing Wealth, invest, Investing | Comments Off on How to Calculate Stock Profit

To calculate stock profit, it’s a relatively simple calculation that involves taking the original price you paid for the stock and subtracting it from the price at which you sold it. So, if you paid $50 per share and the stock is now worth $55, your profit would be $5 per share, minus applicable fees or commissions. If the stock price has dropped since you bought it, you would subtract the current price from the original price, to arrive at the amount of your loss.

Understanding the implications of those gains (or losses) in terms of dollar amounts as well as percentages — and what to do next — is another matter. In most cases you’ll owe taxes on your gains, and/or you can use losses to offset gains. But when and how is where investors need to pay attention.

Key Points

•   Calculating stock profit involves subtracting the purchase price from the selling price, resulting in either a gain or a loss based on market fluctuations.

•   Differentiating between realized and unrealized gains is crucial; only gains from sold stocks are considered realized and subject to taxes.

•   Investors can calculate percentage changes in stock value to compare performance, using the formula: ((Selling Price – Purchase Price) / Purchase Price) x 100.

•   Capital gains tax may apply to profits from sold stocks, with differing rates for short-term and long-term holdings based on the holding period.

•   Tax-loss harvesting allows investors to offset capital gains with losses, potentially reducing overall tax liability while adhering to specific rules like the wash-sale rule.

How Do You Calculate Stock Profit?

As noted, calculating stock profit involves a simple calculation to find the difference between the current share price and the price you initially purchased it – often called the “cost basis.”

Given the history of the stock market, and the constant price fluctuations of almost every stock, most investors should expect the price of the shares they buy to change over time. The question for investors, however, is whether the change is positive (a profit) or negative (a loss).

Realized Gains vs Unrealized Gains

Another question that’s critical for investors: Are those gains or losses realized or unrealized?

When a stock in your portfolio gains or loses value, but you hold onto it, that is considered an unrealized gain or loss. Your asset has appreciated in value, but you haven’t sold it to reap the benefits, or “realized” the gain. As such, you wouldn’t pay additional trading fees and you wouldn’t (yet) face any tax implications because you haven’t actually sold the shares.

If you sell the shares through an online brokerage account or other means, that’s when you realize (or take) the actual cash profit or loss in your account. At that point, trading fees and taxes would likely come into play.

Formula to Calculate Percentage Gain or Loss of Stocks

Calculating stock profit can be done as a dollar amount or as a percentage change. The same is true of losses. While knowing the dollar amount that you’ve gained or lost is relevant for long-term planning and tax purposes, calculating the percentage change will help investors gauge whether one stock had good return when compared with another.

Percentage change = (Price sold – Purchase price) / (Purchase price) x 100

The important thing to remember about this formula is to always keep the purchase price (cost basis) in the denominator. That way the percentage change in the shares is always divided by what an investor paid for them.

Calculating Stock Profit Example

Here’s a hypothetical example using the formula above, but incorporating the number of shares an investor may hold. This will give the total dollar profit as well as the percentage move.

1.    Let’s say an investor owns 100 shares of Stock A, which they bought at $20 a share for a total of $2,000.

2.    The investor sells all of their shares when the stock is trading at $23, for $2,300.

3.    Ignoring any potential investment fees, commissions, or taxes in this hypothetical example, the investor would see a gain of $3 per share or $300 in profit.

4.    What’s the percentage gain? ($23 – $20) / $20 = 0.15 x 100 = 15 or a 15% gain.

Calculating Stock Loss Example

Now let’s look at an example where Stock A declines.

1.    Here, an investor owns 100 shares of Stock B, which they bought at $20.

2.    This time, the investor sells all 100 shares at $18.

3.    This means, the investor has to subtract $18 from $20 to get a $2 loss per share.

4.    What’s the percentage loss? ($20 – $18) / $20 = 0.10 x 100 = 10, or a 10% loss.

As an investor, you can also compare your stock profit with the average historical stock return, that number has historically hovered around 9%.

And if you’re wondering about how to calculate stock profit when shorting stocks, note that that is a more complex investing strategy that requires a more careful and detailed understanding and calculation.

Calculating Percentage Change in Index Funds and Indices

Index funds are mutual funds that track a specific market index, which means they include the companies or securities in that index. An S&P 500 index fund mirrors the performance of the companies in the S&P 500 Index.

To calculate the percentage change of your shares in an index fund, you can approach it the same way you would when you calculate profit or loss from a stock.

You can also calculate the difference between the percentage change of the index itself, between the date you purchased shares of the related index fund and sold them. Here’s an example, using the S&P 500 Index.

Let’s say the index was at 4,500 when you bought shares of a related index fund, and at 4,650 when you sold your shares. The same formula applies:

4,650 – 4,500 / 4,650 = 0.032 x 100 equals a 3.2% gain in the index, and therefore the gain in your share price would be similar. But because you cannot invest in an index, only in funds that track the index, it’s important to calculate index fund returns separately.

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Importance of Calculating Stock Profit

Calculating stock profits (and losses) is important because it can help inform you of how successful your overall strategy has been. That can have a downstream effect in numerous areas:

•   Taxes owed

•   Your overall tax strategy (more on that below)

•   Your asset allocation

•   Your long-term financial picture

How Are You Taxed on Profit From a Stock?

To determine any tax liability resulting from a stock-trade profit, you would start by subtracting the cost basis from the total proceeds to calculate what you’ve earned from a sale. If the proceeds are greater than the cost basis, you’ve made a profit, also known as a capital gain. At this point, the government will take a slice of the pie — you’ll owe taxes on any capital gains you make.

Capital gains tax rates are the rates at which you’re taxed on the profit from selling your stock (in addition to other investments you may hold such as bonds and real estate). You are only taxed on a stock when you sell and realize a gain, and then you are taxed on net gain, which is the difference between your gains and losses.

You can deduct capital losses from your gains every year. So if some stocks sell for a profit, while others sell for an equal loss, your net gain could be zero, and you’ll owe no taxes on these stocks.

Short-Term vs Long-Term Capital Gains Tax

There are two types of capital gains tax that might apply to you: short-term and long-term investment capital gains tax. If you sell a stock you’ve held for less than a year for a profit, you realize a short-term capital gain.

If you sell a stock you’ve held for more than a year and profit on the sale, you realize a long-term capital gain. Short-term capital gain tax rates can be significantly higher than long-term rates. These rates are pegged to your tax bracket, and they are taxed as regular income.

So, if your income lands you in the highest tax bracket, you will likely pay a short-term capital gains rate equal to the highest income tax rate — which is higher than the highest long-term capital gains rate.

Long-term capital gains, on the other hand, are given preferential tax treatment. Depending on your income and your filing status, you could pay 0%, 15%, or a maximum of 20% on gains from investments you’ve held for more than a year.

Investors may choose to hold onto stocks for a year or more to take advantage of these preferential rates and avoid the higher taxes that may result from the buying and selling of stocks inside a year.

When Capital Gains Tax Doesn’t Apply

There are a few instances when you don’t have to pay capital gains tax on the profits you make from selling stock, namely inside of retirement accounts.

The government wants to incentivize people to save for retirement, so it encourages people to set up tax-advantaged retirement accounts, including 401(k)s and/or an individual retirement account, or IRA.

You fund tax-deferred accounts such as 401(k)s and traditional IRAs with pre-tax dollars, which may help lower your taxable income in the year you make a contribution. You can then buy and sell stocks inside the accounts without incurring any capital gains tax.

Tax-deferred accounts don’t allow you to avoid taxes entirely, however, when you make qualified withdrawals after age 59 ½, you are taxed at your regular income tax rate. Roth accounts, such as Roth IRAs function slightly differently. You don’t avoid taxes with these types of accounts, either, since you fund these accounts with after-tax dollars.

Then you can also buy and sell stocks inside a Roth account where any gains grow tax free. Once again, you won’t owe capital gains on profit you make inside the account. And in the case of a Roth, when you make withdrawals at age 59 ½ you won’t owe any income tax either.

Recommended: How to Open an IRA: A 5-Step Guide

Understanding Capital Losses

Though it seems counterintuitive, capital losses may help investors manage their tax liabilities, thanks to a strategy called tax-loss harvesting.

Capital losses can be used to offset gains from the sale of other stocks. Say you sold Stock A for a profit of $15 and Stock C from another company for a loss of $10. The resulting taxable amount is now $5, or $15 minus $10.

In some cases, total losses will be greater than total gains (i.e. a net capital loss). When this happens, you may be able to deduct excess capital losses against other income. If an investor has an overall net capital loss for the year, they can deduct up to $3,000 against other kinds of income — including ordinary and interest income.

The amount of losses you can deduct in a given year is limited to $3,000. However, additional losses can be rolled over and deducted on the following year’s taxes.

There are other limitations with claiming capital losses. The wash-sale rule, for example, prohibits claiming a full capital loss after selling securities at a loss and then buying “substantially identical” stocks within a 30-day period.

The rule essentially closes a loophole, preventing investors from selling a stock at a loss only to immediately buy the same security again, leaving their portfolio essentially unchanged while claiming a tax benefit.

Another way investors try to defer taxes is through automated tax-loss harvesting, or strategically taking some losses in order to offset taxable profits from another investment.

Other Income From Stocks

You may receive income from some stock holdings in the form of dividends, which are unrelated to the sale of the stock. A dividend is a distribution of a portion of a company’s profits to a certain class of its shareholders. Dividends may be issued in the form of cash or additional shares of stock.

While dividends represent profit from a stock, they are not capital gains and therefore fall into a different tax category. (Different types of investment income are taxed in different ways.) Dividends can be classified as either qualified or ordinary dividends, which are taxed at different rates. Ordinary dividends are taxed at regular income tax rates.

Qualified dividends that meet certain requirements are subject to the preferential capital gains tax rates. Taxpayers are responsible for identifying the type of dividends they receive and reporting that income on Form 1099-DIV.

Brokerage Fees or Commissions

Investors need to remember that there are brokerage account fees or commissions that you might have paid when you bought the stock. You may have overlooked these costs, but they do have an effect on your investment’s profitability and, depending on the amounts involved, these fees could make a profitable trade unprofitable.

Tally all the fees you paid and subtract that sum from your profit to find out what your net gain was. Note that your brokerage account may do these calculations for you, but you might want to know how to do them yourself to have a better understanding of how the process works.

Some brokerage firms offer zero commission trading, but they may be engaging in a practice called payment for order flow, where your orders are sent to third parties in order to be executed.

When to Consider Selling a Stock

There are a number of reasons investors may choose to sell their stocks, especially when they may generate a positive return. First, they may need the money to meet a personal goal, like making a down payment on a home or buying a new car. Investors with retirement accounts may start to liquidate assets in their accounts once they retire and need to make withdrawals.

Investors may also choose to sell stocks that have appreciated considerably. Stocks that have made significant gains can shift the asset allocation inside an investor’s portfolio. The investor may want to sell stocks and buy other investments to rebalance the portfolio, bringing it back in line with their goals, risk tolerance, and time horizon.

This strategy may give investors the opportunity to sell high and buy low, using appreciated stock to buy new, potentially cheaper, investments. That said, investors might want to avoid trying to time the market, buying and selling based on an attempt to predict future price movements. It’s hard to know what the market or any given stock will do in the future.

Sometimes investors may decide that buying a certain stock was a mistake. It may not be the right match for their goals or risk tolerance, for example. In this case, they may decide to sell it, even if it means incurring a loss.

The Takeaway

Assuming a stock’s price is higher when you sell it versus when you bought it, learning how to calculate stock profit is pretty easy. You simply subtract the original purchase price from the price at which you sold it. (If the selling price is lower than the purchase price, of course, you’d see a loss.)

It’s important to calculate stock profits and losses because it can impact your taxes. If you realize a gain, you may owe capital gains tax; if you realize a loss, you may be able to use the loss to offset your gains. Of course, if you’re trading stocks within an IRA, Roth IRA, or 401(k), you avoid any tax consequences.

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

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

Why is it important to calculate stock profit?

Investing in stocks comes with a certain amount of risk. It may help you to know what your gains and losses are so that you can gauge the winners and losers in your portfolio. Calculating stock profit also helps with tax planning and portfolio rebalancing.

How can you calculate stock profit?

Calculating the dollar amount is relatively simple (you subtract the final selling price from the original purchase price, or vice versa). The formula for determining the percentage change is also straightforward:

(Price sold – Purchase price) / (Purchase price) x 100 = Percentage change

What is an example of calculating stock profit?

An investor owns 100 shares of Stock X, which they bought at $50 a share for a total of $5,000. The price rises to $55, a gain of $5, and the investor sells all their shares for a $500 profit ($5,500 total), excluding commissions, taxes, fees.

What’s the percentage gain? ($55 – $50) / $50 = 0.10 x 100 = 10 or a 10% gain.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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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08
2024
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Overweight Stock, Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Overweight Stock, Explained

When a financial analyst rates a stock as overweight, it means that the analyst believes an overweight stock will likely outperform other stocks in its industry over the next six to 12 months. Conversely, if they describe a stock as underweight, they believe that it will perform poorly in the future.

It may be helpful to think of these terms as pointers: as if an industry specialist were saying, “You might want to overweight Stock X in your portfolio” or “maybe you should under-weight Stock Y.” These ratings are typically the result of factors in the news or pertaining to a specific company’s prospects. But the terms “overweight” and “underweight” also refer to a stock’s weighting in a relevant index or benchmark.

Key Points

•   An overweight stock rating indicates that analysts expect the stock to outperform its industry peers within the next six to twelve months.

•   The terms overweight and underweight also refer to a stock’s proportion in an investment portfolio, guiding investors on how much to hold.

•   Different market indexes apply unique weighting systems, influencing how stocks are rated as overweight or underweight based on market capitalization or stock price.

•   Investors should be cautious, as an overweight stock may not always lead to significant gains and could lead to portfolio imbalance if not managed properly.

•   The context of both the market and individual portfolios is crucial when interpreting overweight ratings, emphasizing the need for careful investment decisions.

What Is an Overweight Stock?

As noted, an overweight stock is one that analysts believe will outperform others in its sector or market segment in the near future. Similarly, overweight stock is a moniker that may also describe a specific security’s weighting in a portfolio, and one that analysts think investors should buy more of – so, its meaning can be contextual in certain situations.

💡 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.

Types of Ratings and Where They Came From

To understand stock ratings related to weight, it’s important to know that market indexes assign a weight to the investments they track to be sure that the index accurately reflects the performance of that market sector.

For example, the S&P 500® tracks 500 large-cap U.S. companies. The companies in the index — called the constituents — are weighted by market capitalization. A company’s market cap is calculated by multiplying the current share price by the total number of outstanding shares.

Companies in that index are weighted based on the proportion of the overall index their market cap represents. Other indexes may use a different weighting system. The Dow Jones Industrial Average, for example, tracks 30 blue chip companies and weights them based on stock price. Companies with a higher share price are given more weight than those with lower prices.

Because of these different weighting systems, it’s important to understand that an overweight to a particular stock with regards to one index may not be the same when it comes to another.

Overweight Stocks

When an analyst rates Stock X as overweight, it’s generally a positive sign. First, they believe Stock X is likely to outperform its benchmark index, or even the market as a whole, depending on market conditions, so investors should consider holding more of the stock.

Bear in mind that an “overweight stock” rating doesn’t necessarily mean that stock is a juggernaut. In a down market, being overweight could simply mean the company might not lose as much ground as its peers, or it might grow less slowly than its peers.

Underweight Stocks

When an analyst rates Stock Y as underweight, the analyst believes that Stock Y is likely to underperform its benchmark, and investors should consider holding less of this stock.

Equal Weight Stocks

When an analyst gives an equal weight rating to a stock, that simply means it’s in line with the overall benchmark. Again, when considering these ratings it’s important to keep in mind the overall context of the market, and what these ratings mean to analysts.

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Example of an Overweight Stock

A very simple example of an overweight stock could be when a stock, Stock X, is selling for $50, but experts and analysts think it’s undervalued and should trade for $75, it could be overweight.

Further, an overweight stock rating can be taken in two ways: First, that the stock will outperform its benchmark index and second that investors may want to take advantage of the increase in price.

When an analyst indicates their belief that a stock will appreciate, they may also state a potential time frame and price target for the stock. So, if Stock X is trading at $75 per share, and the company releases new earnings data that’s positive, an analyst might rate the stock as overweight, with a price target of $100 per share in the coming year.

💡 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.

The Downside of Weighting Stocks

One critique of this rating system is that no analyst, of course, can recommend how many shares investors should buy. It’s simply not possible for analysts to know whether Investor A’s portfolio might benefit from an additional 100 shares of Stock X, while Investor B might want to buy 1,000 shares of Stock X.

As a result, it’s incumbent on individual investor’s themselves to keep an eye on how relevant an overweight stock rating might be for their specific allocation. Buying more of Stock X could, in theory, create an imbalance and reduce a portfolio’s overall diversification. So while an overweight stock might be a good thing, an overweight portfolio usually is not.

How Can Investors Interpret Overweight Stocks?

At first glance, the terms overweight and underweight may seem more or less synonymous with “buy” and “sell” — in that case, why don’t analysts use these more straightforward terms?

In fact, the terms overweight and underweight do have a slightly different connotation than simply to buy or sell a security. Rather, the terms suggest a recommendation that a portfolio hold more or less of a particular position than an index or other benchmarks would suggest.

It may mean acquiring more, or selling some, of a particular investment. But it wouldn’t necessarily mean buying something new or selling all of a position. For example, if your portfolio has an allocation to tech stocks, and an analyst recommends overweighting one of those stocks, you may want to buy more of that company. Or you may not need more growth in your tech holdings, so you might look for an overweight stock.

Also, analysts aren’t always comfortable giving specific directions to buy or sell certain securities. The terms overweight and underweight are more like offering guidance: “Here’s what I think of Stock X or Stock Y. I’ll let the investor take it from here.”

In many cases an overweight or underweight recommendation might not be very useful for investors. For example, if an analyst recommends an overweight to a certain commodity but an investor’s portfolio doesn’t hold any commodities, this information may not have much bearing on their situation.

Can a Portfolio Be Considered Overweight?

Overweight can refer to a portfolio that holds more of a stock or other investments than it theoretically should. For individual investors, this might mean that more of a portfolio is allocated to stock than the investor intended.

For example, say an investor has a portfolio allocation in which 70% of its allocation is held in stock and 30% is held in bonds. If the stock market goes up, the proportion of the portfolio held in stock may grow beyond the 70% mark. At that point, the portfolio may be described as overweight in stocks, and an investor may want to rebalance to bring it in line with their initial allocation plan.

It may come as no surprise that the opposite of an overweight allocation is an underweight allocation. For example, if the stock allocation in the portfolio above fell below 70%, that allocation could be described as underweight in stocks.

The term can also apply in a narrower sense. For example, a stock portfolio could hold too much stock in one company, sector, or geographical region. In each case the holding could be described as overweight.

Professional fund managers may also use overweight to describe portfolios they work with that are off track with their index, including mutual funds, exchange-traded funds, and index funds. From time to time, a fund may get out of line with its benchmark index by holding more or less of an investment that index tracks.

For example, say an index fund is built to track the S&P 500. To track the index, fund managers will usually attempt to hold every stock in the index. Additionally, they will try to match the proportion of each individual company their fund holds to the index as well. So if stock A represents 5% of the original index, the fund will also hold 5% of stock A.

Some funds have a little bit of wiggle room in terms of how far they can stray from the index. Some might be allowed to hold more or less stocks if they think the stocks will outperform or underperform. When they hold more than the index, the managers are taking an overweight position. And when they hold less than the index, the managers are taking an underweight position.

The Takeaway

Overweight stocks are those that may be undervalued by the market. When an analyst gives a stock an overweight rating, broadly speaking it could be a good thing. If the analyst is correct, and the stock is indeed poised to perform better than its benchmark — maybe even better than the market as a whole — investors may want to buy that stock.

But the necessary caveat is that it all depends on context — the context of the market, and the context of an investor’s portfolio overall. You don’t want to buy a stock that could throw your allocation off, and make your portfolio overweight in a way that’s not ideal.

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

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

Is overweight stock good?

An overweight stock can be good for investors looking for a relative deal, but it may not be a good thing if the investor already owns shares of the stock.

What is the difference between overweight and outperform stocks?

Outperform stocks and overweight stocks are similar, and the terms are often used interchangeably. But generally, “outperform” may describe a stock that’s undervalued or expected to offer solid returns in the future, but perhaps perform not quite as well as an “overweight” stock.

What is the difference between buy and overweight?

On an analysts’ rating system, “buy” and “overweight” stocks are rated differently, with “buy” being a higher rating – though both ratings are positive.

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