Jun
16
2023
Tail Risk Explained: Woman investing on phone

Tail Risk, Fat Tails, and What They Mean for Investors

By | Growing Wealth, invest, Investing | Comments Off on Tail Risk, Fat Tails, and What They Mean for Investors

Tail risk is the danger of large investment gains or losses because of sudden and unforeseen events. The term “tail risk” refers to the tails on a bell curve: While the fat middle of the bell curve represents the most probable returns, the tails — both positive and negative — represents the least likely outcomes.

When looking at the bell curve that gives the phenomenon its name, investors sometimes also refer to tail risk as “left-tail risk,” as it refers to the very unlikely and very negative outcomes on the curve.

What Is Tail Risk?

Tail risk is defined by a concept called standard deviation. As a metric, standard deviation shows how widely the price of an asset fluctuates above and below its average. For a volatile stock, the standard deviation will be high, while the standard deviation for a stock with a steady value will be low.

Standard deviation is an important number that investors use to understand how historically volatile a stock is, as well as the level of volatility they can project for it in the future. That projection is based on the underlying assumption that the price changes of a stock will follow the pattern of what’s called normal distribution.

Normal distribution is a statistical term used to describe the probability of an event, and it shapes the bell curve. If you flip a coin 10,000 times, how often will it land on heads or tails? Each time, there is a 50% probability it will land on heads or tails, and the curve describes the likelihood that those 10,000 flips will come out 50/50. The fat middle of the curve says it will be close to 50/50, but there are extremely low probabilities at the low (or skinny) ends of the bell curve that it could be more like 80/20 heads or 80/20 tails.

That approach to probability predicts that a stock selling at a mean price of $45 with a $5 standard deviation is 95% certain to sell between $35 and $55 at the close of that day’s market.

“Tail risk” is used to describe the risk that an investment will fall or rise by more than three standard deviations from its mean price. To continue the example, the hypothetical stock $45 stock has entered the domain of tail risk if, at the end of the trading day, it is priced at $30 or below, or at $60 or above.


💡 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.

What are Fat Tail Risks?

Unpredictable events are ironically predictable, and happen in the markets on a regular basis. And those markets, such as the one following the onset of the pandemic in early 2020, exhibit much “fatter” tails. Another period characterized by having an extremely fat tail was the 2008 Financial Crisis.

They’re called “fat tails” because the outcomes that had been on the extremes were suddenly happening, instead of the ones previously considered probable. This condition is also called by the mathematical term leptokurtosis. As a general rule, because they deviate so wildly from the expected norm, fat tail events present great risk as well as great opportunities for investors.

Tail Risk Strategy

Financial models such as Harry Markowitz’s modern portfolio theory (MPT) or the Black-Scholes Merton option pricing model, employ the assumption that the returns of a given asset will remain between the mean and three standard deviations.

The assumptions made in these long-term market projections can help with planning. But they’re not realistic about how investors receive their market returns over the long term. Rather, the bulk of their returns, no matter how diversified their portfolio, are largely the result of positive tail events. The power of tail events over long periods is one reason that experts tell investors to stay in the markets during fat-tail periods of volatility, even if it is stressful at the time.

Why Investors Hedge Tail Risks

Left-tail events also have the potential to have an extremely negative impact on portfolios. That’s why many investors hedge their portfolios against these events — aiming to improve long-term results by reducing risk. But these strategies necessarily come with short-term costs.

Downside Protection

One strategy that’s designed to protect against tail risks involves taking short positions that counterbalance the rest of a portfolio, also known as buying downside protection. For example, if an investor is heavily invested in U.S. equities, they may consider investing in derivatives on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which correlates to the inverse of the S&P 500 index. (Using short strategies is also one way to invest during a bear market.)

Another way to hedge by buying downside protection is to purchase out-of-the-money put options. When the assets connected to these put options go down, the put options become more valuable. Granted, buying those options costs money, but it can be a strategy to consider for investors who believe the markets are likely to be volatile for a while.

Tail Risk Parity

Tail risk parity is a way to structure a portfolio based on the expectations that events that have a negative impact on one asset class will likely be a boon to others. This requires looking at each asset class in terms of how it might fare in the event of a particular crisis, and then finding an asset class that would likely do well in that same circumstance, and then keeping them in balance within your portfolio.

Managed Futures Funds

Other investors who want to trim their exposure to tail risks may invest in managed futures funds. These funds buy long and short futures contracts in equity indexes, and can thrive during times of crisis in the markets.

The Takeaway

A tail risk is the risk that an event with a low likelihood of happening will happen. And it’s something that investors need to keep in mind. There are a few different ways to mitigate the impact of tail risk in an investment portfolio, but for long-term investors, it can be helpful to keep in mind that tail risk is responsible for most returns over time.

Tail risk and fat tails may seem like granular investing terms, but they do play a role in the markets, which means that every investor can benefit from learning about them, and how they can affect a portfolio.

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.

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.

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

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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Jun
16
2023
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How to Choose a 401(k) Beneficiary: Rules & Options

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on How to Choose a 401(k) Beneficiary: Rules & Options

Choosing a 401(k) beneficiary ensures that any unused funds in your account are dispersed according to your wishes after you pass away. Whether you’re married, single, or in a domestic partnership, naming a beneficiary simplifies the estate process and makes it easier for your heirs to receive the money.

There’s room on 401(k) beneficiary forms for both a primary and contingent beneficiary. Before making any decisions on a beneficiary and a backup, it can help to familiarize yourself with 401(k) beneficiary rules and options.

Why It’s Important to Name 401(k) Beneficiaries

A 401k account is a non-probate asset. That means it doesn’t have to go through the lengthy probate legal process of distributing your property and assets when you die — as long as you name a beneficiary.

If you die without a beneficiary listed on your 401(k) account, the distribution of the account may have to go through probate, which can take months.

Some plans with unnamed beneficiaries automatically default to a surviving spouse, while others do not. If that’s the case — or if there is no surviving spouse — the 401(k) account becomes part of the estate that goes through probate as part of the will review.

The amount of time it will take for your heirs to go through the probate process varies depending on the state and depends on the complexity of your assets. At a minimum, it can last months.

Another downside of having your 401(k) go to probate instead of being directly inherited by a beneficiary is that the account funds could be used to pay off creditors (if the deceased had unpaid debts that can be covered by the estate).

By naming a 401(k) beneficiary, you ensure your heirs receive the funds in full, especially if you weren’t legally married but want to insure that your domestic partner is your legal beneficiary. A beneficiary designation is currently required in order for your domestic partner to inherit your 401(k).

Having named 401(k) beneficiaries is a decision that overrides anything written in your will, as well as court orders, so it’s important to review your beneficiaries every few years, to make sure your money goes to the person or organization you choose.

What to Consider When Choosing a Beneficiary

Your 401(k) account may hold a substantial amount of your retirement savings. How you approach choosing a 401(k) beneficiary depends on your personal situation. For married individuals, it’s common to choose a spouse. Some people choose to name a domestic partner or your children as beneficiaries.

•   Your primary beneficiary is the main person or organization who you want to receive your 401(k) assets when you die.

•   The contingent beneficiary (aka the secondary beneficiary) will inherit the assets if your primary beneficiary can’t or won’t.

Another option is to choose multiple beneficiaries, like multiple children or siblings. In this scenario, you can either elect for all beneficiaries to receive equal portions of your remaining 401(k) account, or assign each individual different percentages.

Recommended: IRA vs. 401(k): What’s the Difference?

For example, you could allocate 25% to each of four children, or you could choose to leave 50% to one child, 25% to another, and 12.5% to the other two.

In addition to choosing a primary beneficiary, you must also choose a contingent beneficiary. This individual only receives your 401(k) funds if the primary beneficiary passes away or disclaims their rights to the account. If the primary beneficiary is still alive, the contingent beneficiary doesn’t receive any funds.

401(k) Beneficiary Rules and Restrictions

Really, an individual can choose anyone they want to be a 401(k) beneficiary, with a few limitations.

•   Minor children cannot be direct beneficiaries. They must have a named guardian oversee the inherited funds on their behalf, which will be chosen by a court if not specifically named. Choosing a reliable guardian helps to ensure the children’s inheritance is managed well until they reach adulthood.

•   A waiver may be required if someone other than a spouse is designated. Accounts that are ruled by the Employee Retirement Income Security Act (ERISA) have 401(k) spouse beneficiary rules. A spousal waiver is required if you designate less than 50% of your account to your spouse. Your plan administrator can tell you whether or not this rule applies to your specific 401(k).

How to Name Multiple 401(k) Beneficiaries

You are allowed to have multiple 401(k) beneficiaries, both for a single account and across multiple accounts. You must name them for each account, which gives you flexibility in how you want to pass on those funds.

When naming multiple beneficiaries, it’s common practice to divide the account by percentage, since the dollar amounts may vary based on what you use during your lifetime and investment performance.

Complex Rules for Inherited 401(k)s

You may also want to consider how the rules for an inherited 401(k) may affect a beneficiary who is your spouse vs. a non-spousal beneficiary.

Spouses usually have more options available, but they differ depending on the spouse’s age, as well as the year the account holder died.

In many cases, the spouse may roll over the funds into their own IRA, sometimes called an inherited IRA. Non-spouses don’t have that option. In most cases a non-spouse beneficiary must withdraw all the funds from the account within 10 years.

A beneficiary can also take out the money as a lump sum, which will be subject to ordinary income tax. But you need to be at least age 59 ½ in order to avoid the 10% early withdrawal penalty.

Because the terms governing inherited 401(k) are so complex, it may be wise to consult a financial professional.

Recommended: Rollover IRA vs. Traditional IRA: What’s the Difference?

What to Do After Naming Beneficiaries

Once you’ve selected one or more beneficiaries, take the following steps to notify your heirs and to continually review and update your decisions as you move through various life stages.

Inform Your Beneficiaries

Naming your beneficiaries on your 401(k) plan makes sure your wishes are legally upheld, but you’ll make the inheritance process easier by telling your beneficiaries about your accounts. They’ll need to know where and how to access the account funds, especially since 401(k) accounts can be distributed outside of probate, making the process much faster than other elements of your estate plan.

For all of your accounts, including a 401(k), it’s a good idea to keep a list of financial institutions and account numbers. This makes it easier for your beneficiaries to access the funds quickly after your death.

Impact of the SECURE Act

You also need to inform beneficiaries about the pace at which the funds must be dispersed after your death.

Thanks to the terms in the SECURE Act (Setting Every Community Up for Retirement Enhancement), beneficiaries generally must withdraw all assets from an inherited 401(k) account within 10 years of the original account holder’s death. Some beneficiaries are excluded from this requirement, including:

•   Surviving spouses

•   Minor children

•   Disabled or chronically ill beneficiaries

•   Beneficiaries who are less than 10 years younger than the original account holder

Revise After Major Life Changes

Managing your 401(k) beneficiaries isn’t necessarily a one-time task. It’s important to regularly review and update your decisions, especially as major life events occur. The most common events include marriage, divorce, birth, and death.

Common Life Stages

Before you get married, you may decide to list a parent or sibling as your beneficiary. But you’ll likely want to update that to your spouse or domestic partner, should you have one. At a certain point, you may also wish to add your children, especially once they reach adulthood and can be named as direct beneficiaries.

Divorce

It’s particularly important to update your named beneficiaries if you go through a divorce. If you don’t revise your 401(k) account, your ex-spouse could end up receiving those benefits — even if your will has been changed.

Death of a Beneficiary

Should your primary beneficiary die before you do, your contingent beneficiary will receive your 401(k) funds if you pass away. Any time a major death happens in your family, take the time to see how that impacts your own estate planning wishes. If your spouse passes away, for instance, you may wish to name your children as beneficiaries.

Second Marriages and Blended Families

Also note that the spouse rules apply for second marriages as well, whether following divorce or death of your first spouse. Your 401(k) automatically goes to your spouse if no other beneficiary is named. And if you assign them less than 50%, you’ll need that spousal waiver.

Financial planning for blended families takes thought and communication, especially if you remarry later in life and want some or all of your assets to go to your children.

Manage Your Account Well

Keep your 401(k) beneficiaries in mind as you manage your account over the years. While it is possible to borrow from your 401(k), this can cause issues if you pass away with an outstanding balance. The loan principal will likely be deducted from your estate, which can limit how much your heirs actually receive.

Also try to streamline multiple 401(k) accounts as you change jobs and open new employer-sponsored plans. There are several ways to roll over your 401(k), which makes it easier for you to track and update your beneficiaries. It also simplifies things for your heirs after you pass away, because they don’t have to track down multiple accounts.

How to Update 401(k) Beneficiaries

Check with your 401(k) plan administrator to find out how to update your beneficiary information. Usually you’ll need to just fill out a form or log into your online retirement account.

Typically, you need the following information for each beneficiary:

•   Type of beneficiary

•   Full name

•   Birth date

•   You may also need their Social Security number

Although your named beneficiaries on the account supersede anything written in your will, it’s still smart to update that document as well. This can help circumvent legal challenges for your heirs after you pass away.

The Takeaway

A financial plan at any age should include how to distribute your assets should you pass away. The best way to manage your 401(k) is to formally name one or more beneficiaries on the account. This helps speed up the process by avoiding probate.

A named beneficiary trumps anything stated in your will. That’s why it’s so important to regularly review these designations to make sure the right people are identified to inherit your 401(k) assets.

It’s true that you will likely use your 401(k) funds yourself, for your retirement. But because an inherited 401(k) can be a significant asset, beneficiaries will likely face certain income and/or tax consequences when they inherit it. Thus, it’s best to inform the people whom you’re choosing.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Help grow your nest egg with a SoFi IRA.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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Jun
16
2023

Intrinsic Value vs Market Value, Explained

By | Growing Wealth, invest, Investing, Terminology | Comments Off on Intrinsic Value vs Market Value, Explained

Intrinsic value vs. market value refers to the difference between where a stock is currently trading and where it perhaps ought to be, according to its fundamentals. The term “market value” simply refers to the current market price of a security. Intrinsic value represents the price at which investors believe the security should be trading at. Intrinsic value is also known as “fair market value” or simply “fair value.”

When it comes to value vs. growth stocks, value investors look for companies that are out of favor and below their intrinsic value. The idea is that sooner or later stocks return to their intrinsic value. That’s why it can be important to understand the differences and help it inform your strategy.

What Is Market Value?

In a sense, there is only one measure of market value: what price the market assigns to a stock, based on existing demand.

Market value tends to be influenced by public sentiment and macroeconomic factors. Fear and greed are the primary emotions that drive markets. During a stock market crash, for example, fear may grip investors and the market value of many stocks could fall well below their fair market values.

News headlines can drive stock prices above or below their intrinsic value. After reading a company’s annual report that’s positive, investors may pile into a stock. Even though better-than-expected earnings might increase the intrinsic value of a stock to a certain degree, investors can get greedy in the short-term and create overextended gains in the stock price.

The rationale behind value vs price, and behind value investing as a whole, is that stocks tend to overshoot their fair market value to the upside or the downside.

When this leads to a stock being oversold, the idea is that investors could take advantage of the buying opportunity. It’s assumed that the stock will then eventually rise to its intrinsic value.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Is Intrinsic Value?

The factors that can be used to determine intrinsic value are related to the fundamental operations of a company. It can be tricky to figure out how to evaluate a stock. Depending on which factors they examine and how they interpret them, analysts can come to different conclusions about the intrinsic value of a stock.

It’s not easy to come to a reasonable estimation of a company’s valuation. Some of the variables involved have no direct physical, measurable counterpart, like intangible assets. Intangible assets include things like copyrights, patents, reputation, consumer loyalty, and so on. Analysts come to their own conclusions when trying to assign a value to these assets.

Tangible assets include things like cash reserves, corporate bonds, equipment, land, manufacturing capacity, etc. These tend to be easier to value because they can be assigned a numerical value in dollar terms. Things like the company’s business plan, financial statements, and balance sheet have a tangible aspect in that they are objective documents.


💡 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.

Calculating Intrinsic Value vs Market Value

There can be multiple different ways to determine the intrinsic value of an asset. These methods are broadly referred to as valuation methods, or using fundamental analysis on stocks or other securities. The methods vary according to the type of asset and how an investor chooses to look at that asset.

Calculating Intrinsic Value

For dividend-yielding stocks, for example, the dividend discount model provides a mathematical formula that aims to find the intrinsic value of a stock based on its dividend growth over a certain period of time. Dividends are periodic income given to shareholders by a company.

Upon calculating the dividend discount model, an investor could then compare the answer to the current market value of a stock. If market value were to be lower, then the stock could be seen as undervalued and a good buy. If market value were to be higher, then the stock could be seen as overvalued and not worth buying or possibly an opportunity to sell short.

Another method for estimating intrinsic value is discounted cash flow analysis. This method attempts to determine the value of an investment in terms of its projected future cash flows.

While the dividend discount model and discounted cash flow analysis can be seen as objective ways to determine a stock’s value, they also have a large subjective component. Analysts must choose a timeframe to use in their model. Using different timeframes can lead to different conclusions.

Longer timeframes are often thought of as being more accurate because they include more data points. But they could also dilute the significance of more recent trends.

Example Using Dividend Discount Model

For example, if a company had years of steady dividend growth, but recently slashed its dividend by 50%, a dividend discount model analysis based on a long timeframe would show this reduction in dividend payments to be less severe than an analysis based on a shorter time frame.

The longer timeframe would include previous years of dividend growth, which would theoretically outweigh the recent reduction.

The reduction may have come from a large decrease in earnings. If that trend were to continue, the company could be doomed to the point of having to suspend its dividends. So in this hypothetical example, a shorter time frame could actually lead to a more realistic conclusion than a longer one.

Calculating Market Value

The determination of market value is rather simple by comparison. Someone can either simply look at what price a stock is trading at or calculate its current market capitalization. The formula for market capitalization or market cap is:

Total number of outstanding shares multiplied by the current stock price.

Dividing market cap by number of shares also leads to the current stock price.

Sometimes companies engage in “corporate stock buybacks,” whereby they purchase their own shares, which reduces the total number of shares available on the market.

This increases the price of a stock without any fundamental, tangible change taking place. Value investors might say that stocks pumped up by share buybacks are overvalued. This process can lead to extreme valuations in stocks, as can extended periods of market euphoria.

The Takeaway

Intrinsic value and market value describe the values of a security as they’re currently trading versus where their underlying fundamentals suggest they should be trading. Using the intrinsic value vs market value method is likely best suited to a long-term buy-and-hold strategy.

Stock prices can remain elevated or depressed for long periods of time depending on market conditions. Even if an investor’s analysis is spot on, there’s no way to know for sure exactly when any stock will return to its intrinsic value. That’s critical to understand if you hope to utilize intrinsic value vs market value in your own investing strategy.

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.

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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Jun
15
2023
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Is 24/7 Stock Trading Available?

By | Growing Wealth, invest, Investing | Comments Off on Is 24/7 Stock Trading Available?

Stock exchanges typically have set hours during which they operate, but trading activity isn’t restricted to traditional operating hours. After-hours trading sessions allow investors to continue making trades once the markets have closed for the day.

While after-hours trading isn’t exactly the same as regular day trading, there are some advantages to 24/7 trading. For investors who are interested in trading outside normal stock exchange hours, there are some important things to keep in mind.

Reviewing After-Hours Trading

In the U.S. the NYSE and the Nasdaq are the two primary stock exchanges investors can use to trade stocks and other securities. Like the NYSE, the Nasdaq also follows a 9:30 am ET to 4:00 pm ET operating schedule, with certain holidays observed.

Both the NYSE and the Nasdaq allow after-hours trading. After-hours trading is divided into two distinct windows: pre-market trading and post-market trading.

What Is Pre-market Trading?

Pre-market trading allows investors to make portfolio moves in the hours before the market officially opens for the day. For both the NYSE and the Nasdaq, the pre-market trading period extends from 4:00 am ET to 9:30 am ET.

The NYSE also allows for a 30-minute pre-opening season beginning at 3:30 am ET in which limit orders can be entered and queued ahead of the pre-market session.

What Is Post-market Trading?

Post-market trading, also referred to as extended trading, runs from 4:00 pm ET to 8:00 pm ET on both exchanges. If an investor is completing after-hours trading with an online brokerage, the brokerage may set their own hours for when trading can occur, within the time frames the NYSE and the Nasdaq follow.

Of course, this timing pertains to the U.S. markets only. Globally, foreign markets have their own operating hours. Due to time zone differences, stock markets in the U.S. and markets in other countries don’t always operate during the same time periods.


💡 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.

Put your money to work and make
your first trade with active invest.

How After-Hours Trading Works

After-hours trading takes place outside the regular markets so it doesn’t work exactly like regular day trading. During the day, trades occur through exchanges — but during pre-market or post-market trading, they’re completed through a different type of exchange — technically, an alternative trading system known as an electronic communication networks (ECNs).

An ECN matches up buy orders with sell orders from different investors to execute trades. Orders can only be matched if the buy and sell prices are the same.

All trades placed after-hours have to be limit orders — with buyers and sellers agreeing to the price — rather than market-on-open orders, since the markets are closed.

Just like regular day trades, investors may pay commissions to execute an after-hours trade. But the fees charged may be higher than the fees for normal day trades.

Is 24/7 Trading an Option?

Being able to trade stocks 24 hours a day, 7 days a week might sound appealing to active traders or investors who don’t have the opportunity to make trades during regular market hours. But is 24/7 stock trading even possible?

While after-hours trading allows investors more time to execute trades, there is a gap in between the post-market and pre-market hours. Technically, an investor wouldn’t be able to trade between the end of the post-market period at 8:00 pm ET and the beginning of the pre-market period at 4:00 am ET.

However, some online trading platforms have begun rolling out 24/7 trading as a brokerage account option. With this feature, investors would be able to make trades at all times of day — during regular market trading hours, pre-market trading hours, post-market trading hours, and beyond.

For example, if an investor wanted to place a limit order to purchase 100 shares of stock at midnight, they could do so if their online brokerage offered 24/7 trading.

Depending on which trading platform investors are on, they may be limited as to the type of securities they can trade after-hours. For example, some brokerages may only allow 24/7 trades of select individual stocks and exchange-traded funds (ETFs).

Pros of 24/7 Stock Trading

Being able to make trades on one’s own schedule, rather than following the market’s standard trading hours, can yield some benefits.

Trading stocks and other securities after the market closes and before it opens could pay off if an investor is able to capitalize on overnight news or market developments that could affect stock prices, including:

•   Earnings reports. It’s common for companies to release earnings reports after the market has officially closed for the day. If the earnings report looks to boost a stock’s price or cause it to decline, an investor might choose to place an after-hours trade to buy or sell, according to their investment strategy.

•   The announcement of a merger or acquisition.

•   A major political event. For example, the results of a presidential election can influence market outlooks and trading activity.

Trading overnight could allow an investor to get the jump on other investors who normally trade during the day.

There’s also the convenience factor: 24/7 trading is helpful for investors who don’t have time to watch the markets and schedule trades throughout the day.

Trading after-hours means they don’t have to miss out on any opportunities to build and grow their investment portfolio if their day job keeps them busy.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Risks of After-Hours Trading

While having access to 24/7 trading can have its advantages, there are a few potential downsides to keep in mind.

•   Limit orders aren’t guaranteed. There’s no guarantee that limit orders placed after-hours will be executed. For a trade to be completed, an ECN has to be able to match up your order with another investor’s. Since trading volumes are typically lower during the pre-market and post-market periods, finding a match could prove difficult. Or you could get stuck in a trade at a less than desirable price.

•   The potential for increased volatility. Lower trading volume can also lead to increased volatility and sharper, more sudden price movements. For example, an investor may see a much wider gap between the bid price and ask price during after-hours trading.

Those things make 24/7 trading of stocks or other securities riskier overall. For investors considering this strategy, it might require them to pay closer attention to market movements to minimize the potential for losses.

The Takeaway

While 24/7 stock trading was a long-time a dream for some investors, now it’s becoming a reality. As online trading platforms start to offer 24/7 trading to their investors, trading at any hour of the day or night is increasingly possible.

While there are risks to 24/7 trading — notably the chance of increased volatility as well as that a limit order won’t get executed — there are also benefits, such as the convenience of not being limited to the 9:30 am to 4pm ET confines of the NYSE and Nasdaq.

One of the first rules of investing is that in order to make it work for you, you have to get started.

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.

Extended hours are from 9 AM – 9:30 AM and 4 PM – 8 PM ET Monday to Friday. Only limit orders can be placed during extended hours. Orders placed after 4 PM ET that and not filled by 8 PM ET will be canceled. Trading during extended hours involves greater risk including lower liquidity and greater volatility.
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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Jun
13
2023
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What to Know About a Market Sell-Off

By | Growing Wealth, invest, Investing | Comments Off on What to Know About a Market Sell-Off

A market sell-off occurs when a large pool of investors decide to sell stocks. When they do this, stock prices fall as a result. A market sell-off may be due to external events, such as public health emergencies or natural disasters. But sometimes, sell-offs can be triggered by earnings reports that failed expectations, technological disruption, or internal shifts within an industry.

During a market sell-off, stock prices tumble. That stock volatility might lead other investors to wonder whether they should sell as well, whether they should hold their current investments, or whether they should buy while stock prices are low. There are a lot of things to consider.

Understanding Bull Markets vs Bear Markets

Understanding the overall stock market environment can help investors understand how sell-offs exist within the market.

It’s not uncommon to see references to a bull market and a bear market. A bull market is when the stock market is showing gains. There are no specific levels of increase that indicates a bull market, but the phrase is commonly used when stocks are “charging ahead” — and is generally considered a good thing.

A bear market, on the other hand, is typically used to describe situations when major indexes fall 20% or more from their recent peak, and remain there for at least two months.

💡 Looking for more differences? Check out our bear vs bull market comparison.

There are also “corrections.” This is when the market falls 10% or more from a recent stock market high. Market corrections are called such because historically, they “correct” prices to a longer-term trend, rather than hold them at a high that’s not sustainable. Sometimes, corrections turn into a bear market. Other times, corrections reach a low and then begin to climb back to a more level price, avoiding a bear market.

What to Do During a Market Sell-Off

A sell-off can make news, and can make investors feel on-edge. After all, investors don’t want to lose money and some investors fear that a sell-off portends more bad news, like a bear market.

Other investors see sell-offs as an opportunity to buy stocks at lower prices before the market bounces back. But a sell-off or correction may not trigger a dramatic change in every investor’s portfolio. That’s because a sell-off or correction may be limited to a certain market sector or group of stocks, such as if a tariff impacted select companies.

So, what should an investor do during a market sell-off? That depends on the goals of an investor. Market sell-offs are “normal” fluctuations of the market, and investors who have a diversified portfolio may not do anything. Others may choose to either buy or sell—and neither decision is one-size-fits-all.

Pros & Cons of Selling During a Sell-Off

Some investors may get spooked and sell stocks in fear that the market will slide further. But while taking money out of the market may give investors confidence and cash in their pockets, removing money from the market might make it hard for investors to decide when to re-invest in the market in the future. As a result, they may miss opportunities to take advantage of compounding interest in investments.

Pros & Cons of Buying During a Sell-Off

Other investors may see a sell-off as an opportunity to invest when the market is down. They might buy stocks at a lower price, then wait for the market to bounce back. But a market sell-off may not necessarily be the optimum time to buy stocks, especially if it’s unclear what’s driving the sell-off.

Many investors pride themselves on their perceived ability to “time the market,” or buy stocks right before they begin to rise again. But the truth is that “timing the market” often relies on luck, deep knowledge of the industry, timing, or a combination of all three.

For many investors, the best way to “time” the market may be to invest when they can afford to do so in a diversified portfolio, and allow their money to ride out the highs and lows of market movements.

Why Risk Tolerance Matters During Market Sell-Offs

Understanding your own risk tolerance — and investment goals — can help an investor decide how to handle a market sell-off. Risk tolerance is the amount of risk an investor is willing to take, and depends on several factors.

•   Risk capacity. This is your ability to handle a risk. For example, people who are depending on their investment portfolio to fund their lives, such as retirees, may have a lower risk tolerance than young people who have years for their portfolio to make up losses.

•   Benchmarks. Are there benchmarks their portfolio has to hit at set periods of time so that their portfolio reaches the goals they have set?

•   Emotional tolerance. All investors have different emotional capacity for risk tolerance, that may be independent from the actual amount of money within the portfolio.

Understanding your personal risk tolerance can help you build an investment portfolio that may be less vulnerable to market sell-offs and can also give you less trepidation during a sell-off.


💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.

How Diversification Can Help Protect a Portfolio From Sell-Offs

A portfolio diversification strategy may be different between investors, but the underlying logic of any diversification strategy is that they shouldn’t put all of their eggs in one basket. Since it’s not unusual for a sell-off to affect only parts of the market, a diverse portfolio may be able to better ride out a market sell-off than a portfolio that is particularly weighted toward one sector, industry, or exchange.

Some investors may diversify with a range of assets in their portfolio. Others may diversify their portfolio with a range of domestic and international stocks. And others may see diversification as a way to invest beyond the market, such as investing directly in real estate, art, or other different types of alternative investments that are independent of market movement.

Another way some investors ensure diversification within their portfolio is to focus the majority of their portfolio on exchange-traded funds (ETFs) and mutual funds, instead of individual stocks. ETFs and mutual funds can contain hundreds or even thousands of securities across asset classes, which can potentially make the fund less vulnerable to market dips.

Protecting a Portfolio From Sell-Offs

In addition to building a portfolio that’s less vulnerable to market volatility, investors have several options to further protect their portfolio. These preventative investment measures can remove emotion during a market dip or sell-off, so that an investor knows that there are stopgaps and safeguards for their portfolio.

Stop Losses

This is an automatic trade order that investors can set up so that shares of a certain stock are automatically traded or sold when they hit a price predetermined by an investor. This can protect an investment for an individual stock or for an overall market drop. There are several stop loss order variants, including a hard stop (the trade will execute when the stock reaches a set price) and a trailing stop (the price to trade changes as the price of the stock increases).

Put Options

Put options are another type of order that allow investors to sell at a set price during a certain time frame; “holding” the price if the stock drops lower and allowing the investor to sell at the higher price even if the stock drops further.

Limit Orders

Investors can also set limit orders. These allow an investor to choose the price and number of shares they wish to buy of a certain stock. The trade will only execute if the stock hits the set price. This allows investors freedom from tracking numbers as price points shift.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

A market sell-off is triggered when a large group of investors sell their stocks at once, causing stock prices to drop. A sell-off can be caused by world events, industry changes, or even corporate news.

There is no single smart way to react to a sell-off. Different investors will gravitate toward different strategies. But by researching companies and setting up a portfolio based on risk tolerance, an investor can feel confident that their portfolio can withstand market volatility.

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.

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.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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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