invest Archives | Page 42 of 208

Nov

2023

Understanding Economic Indicators

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

An economic indicator is a statistic or piece of data that offers insight into an economy. Analysts use economic indicators to gauge where an economic system is in the present moment, and where it might head next. Governments use economic indicators as guideposts when assessing monetary or fiscal policies, and corporations use them to make business decisions. Individual investors can also look to these indicators as they shape their portfolios.

There are different types of economic indicators and understanding how they work can make it easier to interpret them, and fold them into your investing strategy.

What Is an Economic Indicator?

An economic indicator is typically a macroeconomic data point, statistic, or metric used to analyze the health of an individual economy or the global economy at large. Government agencies, universities, and independent organizations can collect and organize economic indicator data.

In the United States, the Census Bureau, Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) are some of the entities that aggregate economic indicator data.

Some of the most recognizable economic indicators examples include:

• Gross domestic product (GDP)

• Personal income and real earnings

• International trade in goods and services

• U.S. import and expert prices

• Consumer prices (as measured by the Consumer Price Index or CPI)

• New residential home sales

• New home construction

• Rental vacancy rates

• Home ownership rates

• Business inventories

• Unemployment rates

• Consumer confidence

Private organizations also regularly collect and share economic data investors and economists may use as indicators. Examples of these indicators include the Fear and Greed Index, existing home sales, and the index of leading economic indicators.

Together, these indicators can provide a comprehensive picture of the state of the economy and shine light on potential opportunities for investors.

How Economic Indicators Work

Economic indicators work by measuring a specific component of the economy over a set time period. An indicator may tell you what patterns are emerging in the economy — or confirm the presence of patterns already believed to be established. In that sense, these indicators can serve as a thermometer of sorts for gauging the temperature of the economic environment or where an economy is in a given economic cycle.

Economic indicators can not predict future economic or market movements with 100% accuracy. But they can be useful when attempting to identify signals about which way the economy (and the markets) might head next.

For example, an investor may study an economic indicator like consumer prices when gauging whether inflation is increasing or decreasing. If the signs point to a steady rise in prices, the investor might then adjust their portfolio to account for higher inflation. As prices rise, purchasing power declines but investors who are conscious of this economic indicator could take action to minimize negative side effects.

Types of Economic Indicators

Economic indicators are not all alike in terms of what they measure and how they do it. Different types of economic indicators can provide valuable information about the state of an economy. Broadly speaking, they can be grouped into one of three categories: Leading, lagging, or coincident.

Leading Indicators

Leading indicators are the closest thing you might get to a crystal ball when studying the markets. These indicators pinpoint changes in economic factors that may precede specific trends.

Examples of leading indicators include:

• Consumer confidence and sentiment

• Jobless claims

• Movements in the yield curve

• Stock market volatility

A leading indicator doesn’t guarantee that a particular trend will take shape, but it does suggest that conditions are ripe for it to do so.

Lagging Indicators

Lagging indicators are the opposite of leading indicators. These economic indicators are backward-looking and highlight economic movements after the fact.

Examples of lagging indicators include:

• Gross national product (GNP)

• Unemployment rates

• Consumer prices

• Corporate profits

Analysts look at lagging indicators to determine whether an economic pattern has been established, though not whether that pattern is likely to continue.

Coincident Indicators

Coincident indicators measure economic activity for a particular area or region. Examples of coincident indicators include:

• Retail sales

• Employment rates

• Real earnings

• Gross domestic product

These indicators reflect economic changes at the same time that they occur. So they can be useful for studying real-time trends or patterns.

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Popular Economic Indicators

There are numerous economic indicators the economists, analysts, institutional and retail investors use to better understand the market and the direction in which the economy may move. The Census Bureau, for example, aggregates data for more than a dozen indicators. But investors tend to study some indicators more closely than others. Here are some of the most popular economic indicators and what they can tell you as an investor.

Gross Domestic Product

Gross domestic product represents the inflation-adjusted value of goods and services produced in the United States. This economic indicator offers a comprehensive view of the country’s economic activity and output. Specifically, gross domestic product can tell you:

• How fast an economy is growing

• Which industries are growing (or declining)

• How the economic activity of individual states compares

The Bureau of Economic Analysis estimates GDP for the country, individual states and for U.S. territories. The government uses GDP numbers to establish spending and tax policy, as well as monetary policy, at the federal levels. States also use gross domestic product numbers in financial decision-making.

Consumer Price Index

The Consumer Price Index or CPI measures the change in price of goods and services consumed by urban households. The types of goods and services the CPI tracks include:

• Food and beverages

• Housing

• Apparel

• Transportation

• Medical care

• Recreation

• Education

• Communications

CPI data comes from 75 urban areas throughout the country and approximately 23,000 retailers and service providers. This economic indicator is the most widely used tool for measuring inflation. According to the Bureau of Labor Statistics, which compiles the consumer price index, it’s a way to measure a government’s effectiveness in managing economic policy.

Producer Price Index

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods, including:

• Mining

• Manufacturing

• Agriculture

• Fishing

• Forestry

• Construction

• Natural gas and electricity

The Producer Price Index can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Unemployment Rate

The unemployment rate is an economic indicator that tells you the number of people currently unemployed and looking for work. The BLS provides monthly updates on the unemployment rate and nonfarm payroll jobs. Together, the unemployment rate and the number of jobs added or lost each month can indicate the state of the economy.

Higher unemployment, for example, generally means that the economy isn’t creating enough jobs to meet the demand by job seekers. When the number of nonfarm payroll jobs added for the month exceeds expectations, on the other hand, that can send a positive signal that the economy is growing.

Consumer Confidence

The Consumer Confidence Index can provide insight into future economic developments, based on how households are spending and saving money today. This indicator measures how households perceive the economy as a whole and how they view their own personal financial situations, based on the answers they provide to specific questions.

When the indicator is above 100, this suggests consumers have a confident economic outlook, which may make them more inclined to spend and less inclined to save. When the indicator is below 100, the mood is more pessimistic and consumers may begin to curb spending in favor of saving.

The Consumer Confidence Index is separate from the Consumer Sentiment Index, which is also used to gauge how Americans feel about the economy. This index also uses a survey format and can tell you how optimistic or pessimistic households are and what they perceive to be the biggest economic challenges at the moment.

Retail Sales

Retail sales are one of the most popular economic indicators for judging consumer activity. This indicator measures retail trade from month to month. When retail sales are higher, consumers are spending more money. If more spending improves company profits, that could translate to greater investor confidence in those companies, which may drive higher stock prices.

On the other hand, when retail sales lag behind expectations the opposite can happen. When a holiday shopping season proves underwhelming, for example, that can shrink company profits and potentially cause stock prices to drop.

Housing Starts

Census Bureau compiles data on housing starts. This economic indicator can tell you at a glance how many new home construction projects in a given month. This data is collected for single-family homes and multi-family units.

Housing starts can be useful as an economic indicator because they give you a sense of whether the economy is growing or shrinking. In an economic boom, it’s not uncommon to see high figures for new construction. If the boom goes bust, however, new home start activity may dry up.

It’s important to remember that housing starts strongly correlate to mortgage interest rates. If mortgage rates rise in reaction to a change in monetary policy, housing starts may falter, which makes this economic indicator more volatile than others.

Interest Rates

Federal interest rates are an important economic indicator because of the way they’re used to shape monetary policy. The Federal Reserve makes adjustments to the federal funds rate — which is the rate at which commercial banks borrow from one another overnight–based on what’s happening with the economy overall. These adjustments then trickle down to the interest rates banks charge for loans or pay to savers.

For example, when inflation is rising or the economy is growing too quickly, the Fed may choose to raise interest rates. This can have a cooling effect, since borrowing automatically becomes more expensive. Savers can benefit, however, from earning higher rates on deposits.

On the other hand, the Fed may lower rates when the economy is sluggish to encourage borrowing and spending. Low rates make loans less expensive, potentially encouraging consumers to borrow for big-ticket items like homes, vehicles, or home improvements. Consumer spending and borrowing can help to stimulate the economy.

Stock Market

The stock market and the economy are not the same. But some analysts view stock price and trading volume as a leading indicator of economic activity. For example, investors look forward to earnings reports as an indicator of a company’s financial strength and health. They use this information about both individual companies and the markets as a whole to make strategic investment decisions.

If a single company’s earnings report is above or below expectations, that alone doesn’t necessarily suggest where the economy might be headed. But if numerous companies produce earnings reports that are similar, in terms of meeting or beating expectations, that could indicate an economic trend.

If multiple companies come in below earnings expectations, for example, that could hint at not only lower market returns but also a coming recession. On the other hand, if the majority of companies are beating earnings expectations by a mile, that could signal a thriving economy.

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The Takeaway

Economic indicators can provide a significant amount of insight into the economy and the trends that shape the markets. Having a basic understanding of the different types of economic indicators could give you an edge if you’re better able to anticipate market movements when you start investing.

Economic indicators aren’t perfect, and while they can be a helpful part of an investing strategy, investors should always do as much research as they can before making specific moves. Discussing a strategy with a financial professional may be a good idea, too.

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FAQ

What are the leading economic indicators?

There are several leading economic indicators in the U.S., and they include consumer confidence and sentiment, jobless claims, movements in the yield curve, and stock market volatility.

What are the big three macro indicators?

While they may not be “the” big three macro indicators, a few of the key macroeconomic indicators that are often cited are gross domestic product (GDP), the unemployment rate, and the Consumer Price Index (CPI).

Photo credit: iStock/FG Trade

Nov

2023

What to Do With Company Stock If Your Company Goes Public

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

If your company goes public via an IPO, and you’re a stockholder, there are several things you can do, including standing pat and holding your shares, or selling them. But know that holding stock in your company when it goes public can be akin to a roller coaster ride.

There can be a lot of anticipation as the IPO date approaches, but no one really knows what will happen on opening day or during the weeks that follow. With that in mind, before you decide to hold or sell, there are some things to take into consideration.

What Happens During an IPO

During an initial public offering, or IPO, a company offers shares of stock for sale to the general public for the first time — hence the phrase “going public.” Shares of the company are given a starting value known as an IPO price, and when trading begins, the price can rise amid investor demand, or fall if there is little demand.

In any case, the stock will now have some type of value on the open market. As an employee, you may have a stake in the company before the IPO through employee stock options, restricted stock units (RSUs), or you may own shares in the company outright.

Employers may offer stock options and restricted stock units (RSUs) as part of a compensation package to help retain top talent and align employee and company incentives — encouraging employees to work hard to make the company, and its stock, successful.

Stock options give employees the right to buy a specific number of shares of the company, at a set price, by the option’s expiration date.

When company stocks start trading on the open market, depending upon any restrictions, employees can decide to hang on to their shares or sell them and use the proceeds to help meet other goals.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

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Making It Through the Lock-Up Period

That said, when a company goes public, shares and options are often subject to a lock-up period — typically 90 to 180 days — during which company insiders, such as employees, cannot sell their shares or exercise stock options.

Companies typically don’t want employees to flood the market with their stock, which could have a negative effect on the stock price while the company is getting its feet off the ground. When the lock-up period is over, employees are free to exercise their options and sell their shares.

While you’re in the lock-up period, even if it appears that your stocks are suddenly worth a lot of money, that money isn’t in your hands yet. It may be tempting to start spending as if it is, purchasing big-ticket items or putting a down payment on a house. But a lot can happen between an IPO and the end of a lock-up period. So, as the saying goes, don’t count your chickens before they hatch.

The stock market is volatile, and can involve a high degree of risk. If you spend money you have on hand assuming that you’ll be able to pay yourself back once you sell your stock, you may be in for a rude surprise if stock prices fall before then. It may be better to wait until the lock-up period is over before making any big money moves.

Selling Your Shares

If you have decided to sell, the how and when will depend on many factors, but some things that may impact your decision might be whether you own shares outright, have access to shares through employee stock options or through RSUs, and whether the stock has vested. If you already have shares of company stock in-hand, you can usually sell those as soon as the lock-up period ends.

RSUs, on the other hand, are a transfer of restricted stock shares from your employer to give you a certain number of stocks or grants that vest at a later date. Once it does so, the stock is yours to do with what you will. It’s important to note that when restricted stock vests or is transferred to the employee, the fair market value of the stock is included in the employee’s taxable wages. In some cases, RSUs are not taxed until they are fully vested and the company has IPO’d.

You may also have employee stock options, which function much differently than RSUs. A stock option essentially grants you the right to buy company shares at a predetermined price, known as a strike or exercise price.

Stock options are also normally subject to a vesting schedule, but once they vest, you do not have to exercise your right to buy shares immediately, but all stock options come with an expiration date, the last date the option holder must exercise the options or lose them.

For example, say an employee’s exercise price is $60, but the company stock is worth $50 when that employee’s shares vest. If the employee exercised their stock options, they would still have to pay $60 per share, which is more than the stock is worth at that time.

At this point, the stock option is essentially underwater and its value is negative. The employee might choose to wait to exercise their options until the value of the stock is above the exercise price and they can sell the stocks for a profit.

IPOs can be volatile, with share prices swinging up and down. Employees may want to wait for a stock’s prices to stabilize after an IPO to suss out whether it’s the right time to exercise their options.

Options If You Sell

When the lock-up period is over, you may choose to sell your vested shares. In some cases, employees may want to hold on to stock, especially if they anticipate that the price will go up. Other employees may feel they should hold on to stocks out of a sense of loyalty.

However, a concentrated position in any one stock can open you up to risk. If the stock does poorly, it can have an outsized effect on a portfolio. To avoid taking on too much risk, it may make sense to use the proceeds from the sale of company stock to accomplish other goals, such as diversifying your portfolio or paying down debt.

Diversifying Your Portfolio

As mentioned, holding a concentrated position in any one investment can open your portfolio up to additional or unwanted risk. Imagine for a moment that your only investment was the stock you hold in your company.

If stock prices fall, your portfolio will likely feel the full effect of that downward pressure. Now imagine that you hold stock in 100 different companies.

If any one of them does poorly, the effect it will have on your portfolio will be much smaller.

This is the concept behind diversification. A diversified portfolio holds a mix of asset classes, such as stocks and bonds. And within these asset classes, a portfolio likely holds a mix of investments diversified across factors such as size, sector, and geography.

The individual assets in this mix will likely respond in different ways to different market conditions, which can help reduce volatility. For example, a spike in oil prices might hurt some manufacturing stocks but help petroleum stocks.

Selling shares of your company stock and diversifying among a broad group of asset classes might help reduce market risk and volatility inside your portfolio, leaving you less beholden to how one company performs.

Paying Down High Interest Debt

You may also consider selling shares of company stock to pay off high-interest debt. For example, if you carry a balance on your credit card, you could be subject to interest rates of 14% or more. At that rate, your balance can grow quickly, especially if you’re only making minimum payments.

Paying down high-interest debt and saving on interest payments can have a positive impact on your overall finances.

Investing in a Home

Buying a house requires careful planning, even more so when you plan on using company stock to help you do it. There are a number of factors you may want to consider.

First, you might carefully determine whether buying a home is a good investment. You could start by considering how long you plan to stay there. Buying a home comes with all sorts of extra costs, such as appraisal fees, inspection fees, and closing costs.

Housing prices can vary widely from region to region. Keep an eye on housing values in your area to help you determine whether they are likely to rise in the long term. You may want to check out websites that offer market value trends information for the area you are interested in buying.

If you are planning to sell your shares to purchase a house, consider being prepared to sell as soon as you’ve found a house and have been approved for a mortgage loan. Selling right away can help you lock in any gains and help keep you from being at the mercy of market movements. Lenders will also need to verify liquidation before loan closing if the funds are used in the home purchase.

Selling while you know you have enough money to cover a down payment, for example, will help you avoid the risk that stock prices will drop between approval and closing, which could leave you scrambling to find other assets to make up the difference.

Planning for an IPO

If your company goes public, you have options as to what you can do with your shares. Your company IPO and the vesting of your stock are scheduled events, so you can use that to your advantage. You might want to start making a plan as soon as you can if you decide to go the selling route. And make sure you understand the tax consequences of holding or selling your stock and make that consideration a part of your broader tax plan.

For example, RSUs vesting according to their schedule after an IPO might bump you into a higher tax bracket, providing an opportunity to mitigate those effects with other tax-efficient strategies like funding retirement plans. Talk to a tax professional to learn more.

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FAQ

Should you exercise stock options before a company goes public?

It’s possible to exercise stock options before a company goes public, but it’s impossible to say whether any individual should, as circumstances vary between individuals and companies. It may be worth discussing your options with a financial professional.

Are stock options worthless if a company never goes public?

Stock options may become worthless if a company never goes public, or they may lose considerable value. There’s no guarantee that they will do so, however.

Is it better to exercise options before or after an IPO?

It may be relatively common to exercise stock options before a company goes public so as to best take advantage of any post-IPO share value increases.

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Nov

2023

The Investor’s Guide to Navigating 401(k) Fees

By Pam O’Brien | Budgeting & Goals, invest, Preparing for Retirement | No Comments

Approximately 60 million Americans have 401(k) plans through their employer. But many of them aren’t aware of the fees these plans charge. In fact, the majority of investors have no idea how much they’re paying in 401(k) fees, according to a 2022 survey.

Learning about these fees is important because 401(k) fees can add up to tens of thousands of dollars over time and cut into your retirement savings. That’s why you’ll want to find out what these fees consist of and how much they are.

Read on to learn more about 401(k) fees and the steps you may be able to take to help reduce them.

Understanding the Basics of 401(k) Fees

401(k) fees are charged by the provider of your 401(k) plan and the investment funds within the plan. There are three main types of 401(k) fees: investment fees, administrative fees, and service fees. Here’s what these fees cover.

Investment fees: Sometimes also referred to as the expense ratio, investment fees cover an investment’s operating and management costs. These fees are deducted from the investment’s performance and are generally expressed as a percentage.

Administrative fees: These are used to cover the management of your account, including record keeping, accounting, and customer service, among other things. They may be a flat fee or a percentage of the account’s total balance.

Service fees: These fees cover additional services related to your 401(k), such as taking out a 401(k) loan or using financial advisory services. You are only charged these fees if you use the services.

The Impact of Fees on Your Retirement Savings

According to the Investment Company Institute, the average 401(k) participant is in a plan with fees of 0.55%. That means the fees on the average 401(k) account balance of $141,542 would be approximately $778 a year. Over 20 years, that would add up to $15,560 in fees. Over 30 years, fees would total $23,340.

As you can see, this could significantly reduce your retirement savings. And, of course, the greater your account balance, the more fees you would pay.

The types of investments you make will also affect the fees you pay. For instance investments that are actively traded tend to have higher fees, while those that are passively traded typically have lower fees.

How to Interpret Fees on Your 401(k) Statement

Fees are included in your 401(k) statement or prospectus, as required by the U.S. Department of Labor. They may be listed as “Total Asset Based Fees,” “Total Operating Expenses,” or “Expense Ratios.”

Fees should be listed for each investment in your plan. For instance, if a fund had 1.25% of Total Operating Expenses, that means 1.25% of the fund’s assets are used to cover the fund’s operating expenses. So for every $1,000 invested in that fund, the operating expense fees are $12.50.

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How Your 401(k) Fees Stack Up

Once you find the fees in your 401(k) plan, you can determine how they compare to standard 401(k) fees. Here’s a look at what 401(k) fees generally are.

What Are Typical 401(k) Fees?

401(k) fees are based on such factors as the size of the plan, the number of employees in the plan, and the provider offering the plan. These fees can run anywhere from 0.5% to 2%. As mentioned earlier, the average 401(k) participant’s plan fees are approximately 0.55%.

The Significance of Expense Ratios and Industry Averages

You may hear the term “expense ratio” and wonder what it is. An expense ratio is how much you’ll pay over the course of a year to own a particular investment fund such as a mutual fund or an exchange-traded fund (ETF). This fee typically covers the cost of operating and managing the fund. In 2022, the average expense ratio for actively managed mutual funds was 0.66%.

Practical Ways to Minimize 401(k) Fees

While you can’t avoid 401(k) fees, there are some actions you can take to reduce their impact on your retirement savings.

Identifying and Reducing Excess Fees

The fee charged by the plan’s provider is a set fee, however, you may be able to lower the investment fees you pay. To do that, review the expense ratios for the different investment funds in the plan. Then, if it makes sense with your overall investment strategy, pick funds within the plan that have lower expense ratios and avoid funds with higher fees.

In addition, if you think the 401(k) fees charged by your plan are too high in general, speak to your human resources department and ask if they would consider switching to another 401(k) plan with lower fees. This may not be possible, but it doesn’t hurt to ask.

Addressing Hidden Fees in Your 401(k)

The fees in your 401(k) aren’t technically hidden. But they do go by names you may not be familiar with. Here’s how to spot them.

Tools for Uncovering Hidden Fees

The best way to find the fees in your 401(k) is to carefully read through your plan’s prospectus. You now know to look for investment fees or expense ratios, administration fees, and service fees. In addition, look for “12-b1” fees. You may find them fees listed under marketing and distribution. These fees are for the agent or broker who sold the 401(k) plan to your employer. 12-b1 fees are capped at 0.75% of a fund’s assets annually.

Understanding Revenue Sharing and Its Implications

Revenue sharing means adding non-investment fees to a fund’s operating expenses. A 12-b1 fee is one example of this. Revenue sharing fees typically pay for things like record keeping.

Not every 401(k) plan uses revenue sharing, and not all investment funds use them either. Revenue sharing tends to be more likely for actively managed funds rather than passively managed funds like index funds.

That means if you have more actively managed funds, you could be paying more than a colleague who has index funds.

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How Fees Affect Your Retirement Savings Over the Long-Term

401(k) fees can add up over the years, substantially reducing your retirement savings. And one percentage point in the amount of fees you pay can make a big difference.

Case Studies: The Cumulative Effect of Fees Over Time

Let’s say two individuals work for different companies with different 401(k) plans. Person A has a 401(k) that charges 0.50% in fees, and Person B has a plan that charges 1% in fees. If they each invest $100,000 over 20 years with a 4% annual return, 401(k) fees would reduce the value of Person A’s retirement savings by $10,000, while Person B’s retirement savings would be reduced by almost $30,000.

Proactive Measures to Safeguard Your Retirement Funds

In order to minimize the impact of fees on your retirement savings, find out what fees your 401(k) charges. Also, look at the expense ratios for each fund in the plan and choose funds with lower expenses if you can.

In addition, if you leave your job and move to a new employer, you may pay additional 401(k) fees if you keep your old plan with your former employer. And if you’ve changed jobs multiple times and left your 401(k)s with your former employers, then you could be paying 401(k) fees on multiple accounts.

Fortunately, there are steps you can take to avoid these 401(k) fees. You aren’t required to keep your account with your former employer, and you won’t be forced to liquidate it. Instead you could roll over your 401k into your new 401k plan with your new employer, or roll it over into an IRA managed by you.

The benefit of setting up a separate account is that the next time you change jobs, you will automatically have somewhere to rollover your 401(k). With your money in one place, you can more easily see whether you are on track to reach your retirement goals.

The Takeaway

401(k) fees could potentially cost you tens of thousands of dollars or more and substantially reduce your retirement savings. If you have a 401(k), it’s important to learn about the fees charged by your plan. Read over your statements and the plan’s prospectus to find out what and how much these fees are. If possible, choose investment fund options with lower fees to help save money.

And when you leave a job, rather than letting the 401(k) sit with your former employer, consider rolling it over to your new employer’s 401(k) or into a traditional or Roth IRA. One advantage of an IRA is that you will likely have more investment options to choose from and more control of your retirement funds.

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

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

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SOIN1023138

Nov

2023

Guide to Secured Bonds vs Unsecured Bonds

By Kelly Boyer Sagert | Growing Wealth, invest, Investing, Terminology | Comments Off

A secured bond has an asset as collateral backing up a person’s investment while an unsecured one doesn’t have collateral backup. Here’s more about differences.

Nov

2023

A Guide to Financial Securities Licenses

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

Before someone can sell securities or offer financial advice they must first obtain the appropriate securities license. The Financial Industry Regulatory Authority (FINRA) is the organization that sets the requirements, oversees the process for earning an investments license, and administers most of the tests.

If you’re considering a career in the financial services industry it’s important to understand how securities licensing and registration works. Investors may also benefit from understanding what the various FINRA licenses signify when selecting an advisor.

Key Points

• Securities licenses are required for individuals to sell securities and offer financial advice.

• The Financial Industry Regulatory Authority (FINRA) sets the requirements and administers most of the tests for earning securities licenses.

• Different licenses allow financial professionals to offer a range of financial products and services to clients.

• The North American Securities Administrators Association (NASAA) is responsible for licensing investment advisor firms and enforcing state securities law.

• Some common FINRA licenses include Series 6, Series 7, Series 3, Series 63, Series 65, and Series 66, each with its own specific focus and requirements.

What Is a Securities License and Who Needs Them?

A securities license is a license that allows financial professionals to sell securities and/or offer financial advice. The type of license someone holds can determine the range of financial products and services they have authorization to offer to clients. Someone who holds one or more securities or investments licenses is a registered financial professional.

FINRA is the non-governmental agency responsible for overseeing the activities of registered financial professionals. That includes individuals who hold FINRA licenses to sell securities or offer advisory services. Individual investors do not need a license to buy and sell stocks.

Under FINRA rules, anyone who’s associated with a brokerage firm and engages in that firm’s securities business must have a license.

Some specific examples of individuals who might need to have a license from FINRA include:

• Registered Investment Advisors (RIAs)

• Financial advisors who want to sell mutual funds, annuities, and other investment packages on a commission-basis

• Investment bankers

• Fee-only financial advisors who only charge for the services they provide

• Stockbrokers and commodities or futures traders

• Advisors who oversee separately managed accounts

• Individuals who want to play an advisory or consulting role in mergers and acquisitions

• IPO underwriters

The North American Securities Administrators Association (NASAA) represents state securities regulators in the United States, Canada, and Mexico. This organization is responsible for licensing investment advisor firms and securities firms at the state level, registering certain securities offered to investors, and enforcing state securities law.

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

Types of FINRA Licenses

FINRA offers a number of different securities licenses. If you’re considering a career in securities trading, it’s important to understand which one or ones you might need. The appropriate license will depend on the type of securities that you want to sell, how you’ll get paid, and what (if any) other services you’ll provide to your clients.

Here’s a rundown of some of the most common FINRA licenses, what they’re used for and how to obtain one:

Series 6

FINRA offers the Series 6 Investment Company and Variable Contracts Products Representative Exam for individuals who work for investment companies and sell variable contracts products. The types of products you can sell while holding this securities license include:

• Mutual funds (closed-end funds on the initial offering only)

• Variable annuities

• Variable life insurance

• Unit investment trusts (UITs)

• Municipal fund securities, including 529 plans

Obtaining this FINRA license requires you to also pass the introductory Securities Industry Essentials (SIE) exam. This 75-question exam tests your basic knowledge of the securities industry. FINRA offers a practice test online to help you study for the SIE. You can also watch a tutorial to learn how the 50-question Series 6 exam works.

Beyond those options you may consider investing in a paid Series 6 study prep course. Series 6 courses can help you familiarize yourself with the various variable products you can sell with this license and industry best practices. You’ll need to obtain a score of at least 70 to pass both the SIE and the Series 6 exam.

Series 7

People who see stocks and other securities must take the Series 7 General Securities Representative Exam. A Series 7 investments license is typically needed to sell:

• Public offerings and/or private placements of corporate securities (i.e. stocks and bonds)

• Rights

• Stock warrants

• Mutual funds

• Money market funds

• Unit investment trusts

• Exchange-traded funds (ETFs)

• Real estate investment trusts (REITs)

• Options on mortgage-backed securities

• Government securities

• Repos and certificates of accrual on government securities

• Direct participation programs

• Venture capital

• Municipal securities

• Hedge funds

This securities license offers the widest range, in terms of what you can sell.

You’ll need to take and pass the SIE to obtain a Series 7 exam. The Series 7 exam has 125 questions in a multiple choice format and 72% is a passing score. FINRA offers a content outline you can review to get a feel for what’s included on the exam. You may also benefit from taking a study course that covers the various securities you’re authorized to sell with the Series 7 license as well as the ethical and legal responsibilities the license conveys.

Series 3

Investment professionals can earn the Series 3 license by completing the Series 3 National Commodities Futures Exam. This test focuses on the knowledge necessary to sell commodities futures. This is a National Futures Association (NFA) exam administered by FINRA. It has 120 multiple choice questions, with 70% considered a passing score.

You have to pass the Series 3 license exam to join the National Futures Association. In terms of what’s included in the exam and how to study for it, the test is divided into these subjects:

• Futures trading theory and basic functions terminology

• Futures margins, options premiums, price limits, futures settlements, delivery, exercise and assignment

• Types of orders

• Hedging strategies

• Spread trading strategies

• Option hedging

• Regulatory requirements

Neither FINRA nor the NFA offer detailed study guides or practice tests for the Series 3 securities license. But you can purchase study prep materials online.

💡 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.

Series 63

The Series 63 Uniform Securities Agent State Law Exam is an NASAA exam administered by FINRA. The test has 60 questions, of which you’ll need to get at least 43 correct in order to pass with a score of 72%.

You’ll need this license if you also hold a Series 6 or Series 7 license and you want to sell securities in any state. The NASAA offers a downloadable study guide that offers an overview of what’s included on the Series 63 securities license exam. Topics include:

• Regulation of investment advisors

• Regulation of broker-dealers

• Regulation of securities and issuers

• Communication with customers and prospects

• Ethical practices

Beyond that, the NASAA offers a list of suggested vendors for purchasing Series 63 exam study materials. But it doesn’t specifically endorse any of these vendors or their products for individuals who plan to obtain a Series 63 license.

Series 65

The Series 65 Uniform Investment Adviser Law Exam is another NASAA test that’s administered by FINRA. Holding this license allows you to offer services as a financial planner or a financial advisor on a fee-only basis. The exam has 130 multiple choice questions and you’ll need to get at least 92 questions correct to pass.

As with the Series 63 exam, the NASAA offers a study guide for the Series 65 exam that outlines key topics. Some of the things you’ll need to be knowledgeable about include:

• Basic economic concepts and terminology

• Characteristics of various investment vehicles, such as government securities and asset-backed securities

• Client investment recommendations and strategies

• Regulatory and ethical guidelines

You can review a list of approved vendors for Series 65 study materials on the NASAA website.

Series 66

The Series 66 Uniform Combined State Law Exam is the third NASAA exam administered by FINRA. Financial professionals who want to qualify as both securities agents and investment adviser representatives take this test.

This multiple choice exam has 100 questions and you’ll need a score of 73 correct or higher to pass. If you already hold a Series 7 license, which is a co-requisite, you could choose to take the Series 66 exam in place of the Series 63 and Series 65 exams.

The study guide and the scope of what the Series 66 exam covers is similar to the Series 65 exam. So if you hold a Series 65 license already, you may have little difficulty in studying and preparing for the Series 66 exam.

The Takeaway

Earning a securities license could help to further your career if you’re interested in the financial services industry. Knowing which license you need and how to qualify for it is an important first step.

Fortunately, you don’t need to hold a FINRA license to invest for yourself. For instance, you could do some research and work at building a diversified portfolio.

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