invest Archives | Page 18 of 208

Q: What Is Liquidity In Stocks?

Liquidity generally refers to how quickly an investment can be bought or sold and converted into cash. The easier an investment is to sell, the more liquid it is.

Q: How Liquid Are Different Assets?

Cash is the most liquid asset. An investment property is an example of a relatively illiquid asset. Stocks generally fall on the relatively liquid side of the liquidity spectrum.

Feb

2024

What Is Liquidity In Stocks?

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Liquidity in stocks generally refers to how quickly an investment can be bought or sold and converted into cash. The easier an investment is to sell, the more liquid it is. Plus, liquid investments generally do not charge large fees when you need to access your money.

For the average investor, liquidity is an important consideration when building a portfolio, as it’s an indicator of how easy it is to access their savings. That can be important to know and understand when sizing up your overall strategy.

Key Points

• Liquidity in stocks refers to how quickly an investment can be bought or sold and converted into cash.

• Market liquidity refers to how quickly a stock can be turned into cash, while accounting liquidity relates to meeting financial obligations.

• Stocks are generally considered liquid assets, but some stocks may be less liquid, especially those traded on foreign exchanges.

• Share turnover and bid-ask spread are metrics used to assess a stock’s liquidity.

• Liquidity risk is the risk of not finding a buyer or seller for assets, which can affect prices.

Types of Liquidity

Liquidity comes in two forms: Market liquidity and accounting liquidity. Here’s how the two are different.

Market Liquidity

Market liquidity refers to how quickly a stock can be turned into cash. High market liquidity means there’s a high supply and demand for an asset. That, in turn, makes it easy for buyers to find sellers and vice versa. As a result, transactions can be completed quickly, even when stock values are dropping.

Accounting Liquidity

Accounting liquidity is related to an individual’s or company’s ability to meet their financial obligations, such as regular bills or debt payments.

For an individual, being liquid means they have enough cash or marketable assets (such as stocks) on hand to meet their obligations.

Companies measure liquidity slightly differently by comparing current assets and debt. In addition to cash and marketable assets, current assets also include inventories and accounts receivable, the money customers owe on credit for goods or services they’ve purchased.

Investors may pay attention to company liquidity if they are researching that company’s stock as a potential buy. Companies with higher liquidity may be in better shape than those in risk of defaulting on their debt.

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

How Liquid Are Different Assets?

An investor’s financial portfolio may be made up of a number of different assets of varying liquidities, including cash, stocks, bonds, real estate, and savings vehicles like certificates of deposit (CDs). Cash is the most liquid asset; there is nothing an investor needs to do to convert it into spendable currency.

On the other hand, an investment property is an example of a relatively illiquid asset, as it might take a long time for an investor to sell it should they need access to their money.

CDs are also relatively illiquid assets because they require investors to tie up their money for a preset period of time in exchange for higher interest rates than those available in regular savings accounts. Individuals who need their money early may have to pay hefty fines to access it.

Stocks generally fall on the relatively liquid side of the liquidity spectrum. Stocks that are easy to buy and sell and said to be highly liquid. Stocks with low liquidity may be tougher to sell, and investors may take a bigger financial hit as they seek buyers.

What Is Liquidity Risk?

Liquidity risk is the risk that an individual won’t be able to find a buyer or seller for assets they wish to trade during a given period of time, which can lead to adverse effects on the price. Liquidity risk is higher for complex investments or investment vehicles like CDs that may charge penalties to liquidate or access funds early.

Are Stocks a Liquid Asset?

For the most part, stocks that are traded on a public exchange are considered liquid assets. Some stocks, like those traded on foreign exchanges, may be less liquid as it takes more time to execute a trade.

Generally speaking, when an individual wishes to execute a trade, they use a brokerage account to issue a buy or sell order. The broker then helps match the individual with other buyers and sellers hoping to take the opposite action.

This process can take a little bit of time. Most stock trades settle within a two-day period. A stock trade executed on a Wednesday would typically settle on Friday. Settlement is the official transfer of stocks from a seller’s account to the buyer’s account, and cash from the buyer to the seller.

Because it can take some time for trades to be executed, there can be a difference in price between when an individual places an order and when that order is fulfilled.

How to Calculate a Stock’s Liquidity

One way to figure out a stock’s liquidity is by looking at a metric known as share turnover. This financial ratio compares the volume of shares traded and the number of outstanding shares. A stock’s volume is the number of shares that have been bought or sold over a given period. Outstanding shares refer to all of the shares held by a company’s shareholders.

Higher share turnover indicates high liquidity; investors have an easier time buying and selling. Investors might want to pay close attention to low share turnover, as this can indicate they may have a difficult time selling shares if they need to.

Another measure of a stock’s liquidity is the bid-ask spread. Bid price is the price an individual is willing to pay at a given point in time. The ask price is the price at which a buyer is willing to sell. The bid-ask spread is the difference between the two.

For highly liquid assets, the bid-ask spread tends to be pretty small — as little as a penny. This indicates that buyers and sellers are generally in agreement over what the price of a stock should be. However, as bid-ask spread grows, it is an indication that a stock is increasingly illiquid.

A wide spread can also indicate that a trade may be much more expensive to execute. For example, there may not be enough trade volume to execute an entire order at one price. If prices are rising, an order can become increasingly pricey.

💡 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.

Examples of Liquid Stocks

The most liquid stocks tend to be those that receive the most interest from investors. The large companies that are tracked by the S&P 500 Index.

Why Stock Liquidity Is Important for Investors

The relative liquidity provided by stocks can be a boon to investors. Stocks help provide the growth needed for investors to meet their savings goals. They are also relatively easy to buy and sell on the market, allowing investors to access their savings quickly when they need it.

The Takeaway

Liquidity is a measure of the ability to turn assets into cash without losing value. So it’s an important metric for investors to pay attention to as they construct their portfolios. But liquidity is just one of many factors to consider when investing.

Investors may want to know how liquid their holdings are so that they can choose the appropriate mix of investments that align with their risk tolerance. It may be comforting to some to know that they can sell investments with relative ease, rather than have their money tied up for the long-term.

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FAQ

What is good liquidity for a stock?

Good liquidity for a stock refers to an investor’s ability to sell the stock in exchange for cash. If a stock is liquid, then it should be relatively easy to sell. If a stock is illiquid, or has bad liquidity, it may be more difficult.

What is a “Liquidity Ratio?”

A liquidity ratio is a financial ratio that can help an investor determine a company’s ability to pay off its debt obligations, particularly in the short-term. There are several liquidity ratios that can be utilized.

Is a higher liquidity better?

Generally, yes, a higher liquidity is better for investors, as it can signal that a company is performing well, and that its stock is in demand. It can also be easier for an investor to sell that stock in exchange for cash.

Photo credit: iStock/insta_photos

Feb

2024

What Is a Quiet Period?

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

When a company is in the process of going public — getting ready for an initial public offering, or IPO — it is required to enter a so-called “quiet period.” During the quiet period, company executives, board members, management, and employees cannot publicly promote the company or its stock. Investment bankers and underwriters also cannot put out buy or sell recommendations.

In effect, the company and its personnel are required to stay quiet for a period of time surrounding the IPO filing.

Key Points

• A quiet period is a period of time when a company going public cannot publicly promote itself or its stock.

• The purpose of a quiet period is to allow the SEC to review the company’s registration without bias or interruption.

• During the quiet period, companies can discuss information already in the prospectus but should avoid generating public interest.

• Quiet periods are not only limited to IPOs but also observed by companies around the end of a quarter.

• Violating the quiet period can result in consequences such as delayed IPO, liability for violating the Securities Act, or disclosure of the violation in the prospectus.

What Is the Point of a Quiet Period?

While companies always have to comply with the federal securities laws — impending IPO or not — the time around an initial public offering is a special time for any company and comes with special rules and restrictions.

It starts when the company files the registration statement (called an S-1) with the Securities and Exchange Commission (SEC), including a recommended offering price for the security, and lasts for 30 days. The S-1 contains:

• a description of the company’s properties and business

• a description of the security being offered

• information about company management

• financial statements certified by independent accountants

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

Companies are allowed to discuss information already in the prospectus during the quiet period, and oftentimes they will go on a “road show” to present this information to big, institutional investors and get a sense for the potential market. Activities generally avoided during the quiet period are advertising campaigns, conferences, and press interviews — basically, anything that might generate public interest in a company or its securities.

Quiet Periods Not Connected to an IPO

While the IPO quiet period by far gets the most attention, it is not the only time that the SEC reins in the communications of companies and their executives. Typically around the end of a quarter, when a company knows the results it will likely release in its quarterly earnings report to investors, the company observes a quiet period to avoid tipping anyone off or trying to get ahead of them in any way.

[ipo_launch]

How Do Companies Violate the Quiet Period?

While the general investing public is supposed to rely on the information contained in S-1s and other official company communications when deciding whether or not to buy the stock, the irony is that public attention to the company is typically very high right before an IPO. All this attention comes at a time when the company itself is supposed to be in its quiet period.

In the past, some companies have run into issues with their senior executives talking to the media during the quiet period. In some cases, the interviews were conducted earlier but published during that time — but either way, it can appear to be a violation of the terms.

What Happens When Quiet Periods Are Violated?

There are no set penalties for violating a quiet period, which is also called “gun-jumping.” If the SEC deems a statement made by a company is in violation of the quiet period, consequences can include:

• A delayed IPO

• Liability for violating the Securities Act

• Requirement to disclose the violation in the company’s prospectus

Delaying the IPO process allows all potential investors to get back on the same page with equal access to information disclosed by the company.

The SEC is also empowered to exact more severe punishments, like civil or even criminal penalties, but typically only pursue these in extreme cases.

What Investors Can Do During a Quiet Period

Quiet periods can be a good time to assess whether you’re interested in investing in a company’s IPO. IPOs have the potential to be lucrative investments, but can also turn out to be extremely volatile and may lose value. There is no guarantee.

Seasoned investors may try to profit at the end of the quiet period, called the quiet period expiration. At this time the stock price and trading volume may see drastic movement up or down, as a flood of information gets released from analysts.

Unbiased prospectus information about recent filings can be viewed on the SEC website. Reading the prospectus can help an investor judge for themself whether a company’s mission, team, and financials look like a sound investment to them.

The Takeaway

The quiet period before an IPO is a time for founders, executives, and employees of a company to stay off the radar, as their official registration forms and other existing info about the company speaks for itself. This allows potential investors to make decisions based on the same information, with no pre-IPO investing hype or manipulation.

Companies may violate quiet periods intentionally or unintentionally, but there are no set penalties for doing so. The SEC may ask that certain measures are taken, however.

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Feb

2024

What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By Austin Kilham | invest, Investing, Money & Life, Preparing for Retirement | Comments Off

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career

Key Points

• When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.

• If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.

• If you have more than $5,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.

• If you quit or are fired, you may lose employer contributions that are not fully vested.

• It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

Quick 401(k) Overview?

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out. In 2024, employees can contribute up to $23,000 a year in their 401(k)s, up from $22,500 in 2023. Employees age 50 and older can make catch-up contributions of $7,500 a year for a total of $30,500 in 2024 and $30,000 in 2023.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employees must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

The more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up. You may also suggest a specific IRA for the rollover.

If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) and it is an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Recommended: How an Employer 401(k) Match Works

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Recommended: What To Invest In Besides Your 401(k)

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.

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FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $5,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

You may also be interested in:

Guide to Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

When Can You Withdraw From Your 401(k)?

Photo credit: iStock/chengyuzheng

Feb

2024

hand holding smartphone on yellow background

What Is Considered a Good Return on Investment?

By Inyoung Hwang | Growing Wealth, invest, Investing | No Comments

A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation. But of course what one investor considers a good return might not be ideal for someone else.

And while getting a “good” return on your investments is important, it’s equally important to know that the average return of the U.S. stock market is just that: an average of the market’s performance, typically going back to the 1920s. On a year-by-year basis, investors can expect returns that might be higher or lower — and they also have to face the potential for outright losses.

In addition, the S&P 500 is a barometer of the equity markets, and it only reflects the performance of the 500 biggest companies in the U.S. Most investors will hold other types of securities in addition to equities, which can affect their overall portfolio return.

Key Points

• A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation.

• The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.

• Different investments, such as CDs, bonds, stocks, and real estate, offer varying rates of return and levels of risk.

• It’s important to consider factors like diversification and time when investing long-term.

• Investing in stocks carries higher potential returns but also higher risk, while investments like CDs offer lower returns but are considered safer.

What Is the Historical Average Stock Market Return?

Dating back to the late 1920s, the S&P 500 index has returned, on average, around 10% per year. Adjusted for inflation that’s roughly 7% per year.

Here’s how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade, assuming little or no volatility (which is unlikely in real life).

It’s important for investors to have realistic expectations about what type of return they’ll see.

For financial planning purposes however, investors interested in buying stocks should keep in mind that that doesn’t mean the stock market will consistently earn them 7% each year. In fact, S&P 500 share prices have swung violently throughout the years. For instance, the benchmark tumbled 38% in 2008, then completely reversed course the following March to end 2009 up 23%.

Factors such as economic growth, corporate performance, interest rates, and share valuations can affect stock returns. Thus, it can be difficult to say X% or Y% is a good return, as the investing climate varies from year to year.

A better approach is to think about your hoped-for portfolio return in light of a certain goal (e.g. retirement), and focus on the investment strategy that might help you achieve that return.

Line graph: 10 Year Model of S&P 500

Why Your Money Loses Value If You Don’t Invest it

It’s helpful to consider what happens to the value of your money if you simply hang on to cash.

Keeping cash can feel like a safer alternative to investing, so it may seem like a good idea to deposit your money into a savings account — the modern day equivalent of stuffing cash under your mattress. But cash slowly loses value over time due to inflation; that is, the cost of goods and services increases with time, meaning that cash has less purchasing power. Inflation can also impact your investments.

Interest rates are important, too. Putting money in a savings account that earns interest at a rate that is lower than the inflation rate guarantees that money will lose value over time.

This is why, despite the risks, investing money is often considered a better alternative to simply saving it. The inflation risk is lower.

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What Is a Good Rate of Return for Various Investments?

As noted above, determining a good rate of return will also depend on the specific investments you hold, and your asset allocation. You can always calculate the expected rate of return for various securities.

CDs

Certificates of deposit (CDs) may be considered a relatively safe investment because they offer a fixed rate of return in return for keeping your money on deposit for a specific period of time. That means there’s relatively little risk — but because investors also agree to tie their money up for a predetermined period of time CDs are also considered illiquid. There is generally a penalty for withdrawing your money before the CD matures.

Generally, the longer money is invested in a CD, the higher the return. Many CDs require a minimum deposit amount, and larger deposits (i.e. for jumbo CDs) tend to be associated with higher interest rates.

It’s the low-risk nature of CDs that also means that they earn a lower rate of return than other investments, usually only a few percentage points per year. But they can be a good choice for investors with short-term goals who need a relatively low-risk investment vehicle while saving for a short-term goal.

Here are the weekly national rates compiled by the Federal Deposit Insurance Corporation (FDIC) as of April 17, 2023:

Non-Jumbo Deposits	National Avg. Annual Percentage Yield
1 month	0.24%
3 month	0.78%
6 month	1.03%
12 month	1.54%
24 month	1.43%
36 month	1.34%
48 month	1.29%
60 month	1.37%

Bonds

Purchasing a bond is basically the same as loaning your money to the bond-issuer, like a government or business. Similar to a CD, a bond is a way of locking up a certain amount of money for a fixed period of time.

Here’s how it works: A bond is purchased for a fixed period of time (the duration), investors receive interest payments over that time, and when the bond matures, the investor receives their initial investment back.

Generally, investors earn higher interest payments when bond issuers are riskier. An example may be a company that’s struggling to stay in business. But interest payments may be lower when the borrower is trustworthy, like the U.S. government, which has never defaulted on its Treasuries.

Stocks

Stocks can be purchased in a number of ways. But the important thing to know is that a stock’s potential return will depend on the specific stock, when it’s purchased, and the risk associated with it. Again, the general idea with stocks is that the riskier the stock, the higher the potential return.

This doesn’t necessarily mean you can put money into the market today and assume you’ll earn a large return on it in the next year. But based on historical precedent, your investment may bear fruit over the long-term. Because the market on average has gone up over time, bringing stock values up with it, but stock investors have to know how to handle a downturn.

As mentioned, the stock market averages a return of roughly 7% per year, adjusted for inflation.

Real Estate

Returns on real estate investing vary widely. It mostly depends on the type of real estate — if you’re purchasing a single house versus a real estate investment trust (REIT), for instance — and where the real estate is located.

As with other investments, it all comes down to risk. The riskier the investment, the higher the chance of greater returns and greater losses. Investors often debate the merit of investing in real estate versus investing in the market.

Likely Return on Investment Assets

For investors who have a high risk tolerance (they’re willing to take big risks to potentially earn high returns), some investments are better than others. For example, investing in a CD isn’t going to reap a high return on investment. So for those who are looking for higher returns, riskier investments are the way to go.

Remember the Principles of Good Investing

Investors focused on seeing huge returns over the short-term may set themselves up for disappointment. Instead, remembering basic tenets of responsible investing can best prep an investor for long-term success.

First up: diversification. It can be a good idea to invest in a wide variety of assets — stocks, bonds, real estate, etc., and a wide variety of investments within those subgroups. That’s because each type of asset tends to react differently to world events and market forces. Due to that, a diverse portfolio can be a less risky portfolio.

Time is another important factor when investing. Investing early may result in larger returns in the long-term. That’s largely because of compound interest, which is when interest is earned on an initial investment, along with the returns already accumulated by that investment. Compound interest adds to your returns.

Investing with SoFi

While every investor wants a “good return” on their investments, there isn’t one way to achieve a good return — and different investments have different rates of return, and different risk levels. Investing in CDs tends to deliver lower returns, while stocks (which are more volatile) may deliver higher returns but at much greater risk.

Your own investing strategy and asset allocation will have an influence on the potential returns of your portfolio over time.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.

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.

Feb

2024

When Do You Pay Taxes on Stocks?

By Kelly Boyer Sagert | Growing Wealth, invest, Investing | No Comments

Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale. But there are other circumstances when stock holdings may generate a tax liability for an investor, too. This is important for investors to understand so that they can plan for the tax implications of their investment strategy. Knowing how your investments could impact your taxes may better prepare you for tax season and allow you to make more informed investment decisions.

First, an important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.

Key Points

• Short-term capital gains tax rates for tax years 2023-2024 range from 10% to 37% based on taxable income.

• Long-term capital gains tax rates for tax years 2023-2024 range from 0% to 20% based on taxable income.

• Short-term capital gains tax rates for married couples filing jointly are higher than for single individuals.

• Long-term capital gains tax rates for married couples filing jointly are the same as for single individuals.

• The tax rates provided are for the specified tax years and are subject to change.

Do You Have to Pay Taxes on Stocks?

Do you need to pay taxes on stocks? It depends. Typically, as mentioned, investors would need to pay capital gains taxes when they sell a stock – the sale of which triggers a taxable event. But broadly speaking, yes, investors need to pay taxes on their stock holdings. The main question and what investors need to figure out, is when do you need to pay taxes on stocks, and what other actions or incidences, besides a sale, could trigger a taxable event.

When Do You Pay Taxes on Stocks?

There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay taxes on those earnings.

Capital gains even have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate – more on that below.

You will only owe capital gains taxes if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes and ROI on your investments, with taxes taken into account.

There are two types of capital gains tax:

Short-term Capital Gains

Short-term capital gains tax applies when you sell an asset that you owned for less than one year, and that gained in value within that time frame. These gains would be taxed at the same rate as your typical tax bracket, so they’re important for day traders to consider.

Short-Term Capital Gains Rates for Tax Years 2023 – 2024
	Single Taxable Income		Married Couple Filing Jointly Taxable Income
	2023	2024	2023	2024
10%	$0 – $11,000	$0 – $11,600	$0 – $22,000	$0 – $23,200
12%	$11,001 – $44,725	$11,6001 – $47,150	$22,001 – $89,450	$23,201 – $94,300
22%	$44,726 – $95,375	$47,151 – $100,525	$89,451 – $190,750	$94,301 – $201,050
24%	$95,376 – $182,100	$100,526 – $191,950	$190,751 – $364,200	$201,051 – $383,900
32%	$182,101 – $231,250	$191,951 – $243,725	$364,201 – $462,500	$383,901 – $487,450
35%	$231,251 – $578,125	$243,726 to $609,350	$462,501 – $693,750	$487,451 to $731,200
37%	$578,126 or higher	$609,351 or higher	$693,751 or higher	$731,201 or higher

Long-term Capital Gains

Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%. Overall, long-term capital gains tax rates are typically lower than those on short-term capital gains.

Long-Term Capital Gains Rates for Tax Years 2023 – 2024
	Single Taxable Income		Married Couple Filing Jointly Taxable Income
	2023	2024	2023	2024
0%	$0 – $44,625	$0 – $47,025	$0 – $89,250	$0 – $94,050
15%	$44,626 – $492,300	$47,026 – $518,900	$89,251 – $553,850	$94,051 – $583,750
20%	$492,301 or higher	$518,901 or higher	$553,851 or higher	$583,751 or higher

Capital Losses

If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains.

You can also apply up to $3,000 in investment losses to offset regular income taxes.

Tax-loss Harvesting

The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.

Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Taxes on Investment Income

You may have taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.

Dividends

You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings. Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.

There are two broad categories of dividends: qualified or nonqualified/ordinary. The IRS taxes non-qualified dividends at your regular income tax bracket. The rate on qualified dividends may be 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually less than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.

Interest Income

This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income level. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.

Net Investment Income Tax (NIIT)

Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for filers filing jointly. Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

When Do I Not Have to Pay Taxes on Stocks?

Again, this should first and foremost be a discussion you have with your tax professional. But there are a few situations you should know about where you often don’t pay taxes when selling a stock. For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when you buy and sell stocks inside the account. However, if you were to sell stock in one of these accounts and then withdraw it, you could owe taxes on the withdrawal.

4 Strategies To Pay Lower Taxes on Stocks

If the answer to “Do you have to pay taxes on stocks?” is “yes” for your personal financial situation, then the question becomes how to pay a lower amount of taxes. Strategies can include:

Buy and Hold

Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.

Tax-loss Harvesting

As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.

Use Tax-advantaged Accounts

Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.

Refrain From Taking Early Withdrawals

Avoiding the temptation to make early withdrawals from your 401(k) or other retirement accounts.

Taxes for Other Investments

Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.

Mutual Funds

Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.

Property

“Property” is a broad category, and can include assets like real estate. The IRS looks at property all the same, however, from a taxation standpoint. In short, property is subject to capital gains taxes (not to be confused with “property taxes,” which are something else entirely. In effect, if you buy a house and later sell it for a profit, that gain would be subject to capital gains taxes.

Options

Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to options trading activity – it may be wise to consult with a financial professional for more details.

Investing With SoFi

For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.

That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.

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 much do you pay taxes on stocks?

How much an investor pays in taxes on stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.

Do you get taxed when you sell stocks?

Yes, investors do generate a tax liability when they sell a stock in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use it to offset tax liabilities generated by other capital gains.

How do you avoid taxes on stocks?

There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy, opting not to take early withdrawals, and utilizing tax-advantaged accounts.

SOIN0723013

Types of Liquidity

Market Liquidity

Accounting Liquidity

How Liquid Are Different Assets?

What Is Liquidity Risk?

Are Stocks a Liquid Asset?

How to Calculate a Stock’s Liquidity

Examples of Liquid Stocks

Why Stock Liquidity Is Important for Investors

The Takeaway

FAQ

What is good liquidity for a stock?

What is a “Liquidity Ratio?”

Is a higher liquidity better?

What Is the Point of a Quiet Period?

Quiet Periods Not Connected to an IPO

How Do Companies Violate the Quiet Period?

What Happens When Quiet Periods Are Violated?

What Investors Can Do During a Quiet Period

The Takeaway

Quick 401(k) Overview?

What Happens to Your 401(k) When You Quit?

Is There Any Difference if You’re Fired?

How Long Do You Have to Move Your 401(k)?

Next Steps for Your 401(k) After Leaving a Job

Cash Out Your 401(k)

Roll Over Your 401(k) Into a New Account

Keep Your 401(k) With Your Previous Employer

Does Employer Match Stop After You Leave?

Look for New Investment Options

The Takeaway

FAQ

How long can a company hold your 401(k) after you leave?

Can I cash out my 401(k) if I quit my job?

What happens if I don’t rollover my 401(k)?

You may also be interested in:

What Is the Historical Average Stock Market Return?

Why Your Money Loses Value If You Don’t Invest it

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What Is a Good Rate of Return for Various Investments?

CDs

Bonds

Stocks

Real Estate

Likely Return on Investment Assets

Remember the Principles of Good Investing

Investing with SoFi

Do You Have to Pay Taxes on Stocks?

When Do You Pay Taxes on Stocks?

Short-term Capital Gains

Long-term Capital Gains

Capital Losses

Tax-loss Harvesting

Taxes on Investment Income

Dividends

Interest Income

Net Investment Income Tax (NIIT)

When Do I Not Have to Pay Taxes on Stocks?

4 Strategies To Pay Lower Taxes on Stocks

Buy and Hold

Tax-loss Harvesting

Use Tax-advantaged Accounts

Refrain From Taking Early Withdrawals

Taxes for Other Investments

Mutual Funds

Property

Options

Investing With SoFi

FAQ

How much do you pay taxes on stocks?

Do you get taxed when you sell stocks?

How do you avoid taxes on stocks?

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