A clearinghouse is a financial institution that acts as a middleman between buyers and sellers in a market, ensuring that transactions take place even if one side defaults. If one side of a deal fails, a clearinghouse can step in to fill the gap, thus reducing the risk that a failure will ripple across financial markets. In order to do this, clearinghouses ask their members for “margin,” or collateral that is held to keep them safe from their own actions and the actions of other members.
While often described as the “plumbing” behind financial transactions, clearinghouses became high profile after the 2008 financial crisis, when the collapse of Lehman Brothers Holdings Inc. exposed the need for steady intermediaries in many markets. Regulations introduced by the Dodd-Frank Act demanded greater clearing requirements, turning the handful of clearinghouses in the country into some of the most systemically important entities in today’s financial system.
Key Points
• Clearinghouses act as intermediaries in financial markets, ensuring transactions complete even if a party defaults.
• Clearinghouses manage the clearing and settlement process, transferring assets and funds between parties.
• Margin requirements and default funds help provide layers of protection against financial instability.
• Clearinghouses gained prominence after the 2008 financial crisis, enhancing market stability.
• Regulators have raised concerns that clearinghouses may be too big to fail, concentrating financial risk.
How Clearinghouses Work
Clearinghouses handle the clearing and settlement for member trades. Clearing is the handling of trades after they’re agreed upon, while settlement is the actual transfer of ownership, or delivering an asset to its buyer and the funds to its seller.
Other responsibilities include recording trade data and collecting margin payments. The margin requirements are usually based on formulas that take into account factors like market volatility, the balance of buy-versus-sell orders, as well as value-at-risk, or the risk of losses from investments.
Because they handle investing risk from both parties in a trade, clearinghouses typically have a “waterfall” of potential actions in case a member defaults. Here are the layers of protection a clearinghouse has for such events:
1. Margin requirements by the member itself. If market volatility spikes or trades start to head south, clearinghouses can put in a margin call and demand more money from a member. In most cases, this response tends to cover any losses.
2. The next buffer would be the clearinghouse’s own operator capital.
3. If these aren’t enough to staunch the losses, the clearinghouse could dip into the mutual default fund made up from contributions by members. Such an action however could, in turn, cause the clearinghouse to ask members for more money, in order to replenish the collective fund.
4. Lastly, a resolution could be to try to find more capital from the clearinghouse itself again — such as from a parent company.
Are Clearinghouses “Too Big to Fail?”
Some industry observers have argued that regulations have made clearinghouses too systemically important, turning them into big concentrations of financial risk themselves.
These critics argue that because of their membership structure, the risk of default in a clearinghouse is spread across a group of market participants. And one weak member could be bad news for everyone, especially if a clearinghouse has to ask for additional money to refill the mutual default fund. Such a move could trigger a cascade of selling across markets as members try to meet the call.
Other critics have said the margin requirements and default funds at clearinghouses are too shallow, raising the risk that clearinghouses burn through their buffers and need to be bailed out by a government entity or go bankrupt, a series of events that could meanwhile throw financial markets into disarray.
Clearinghouses in Stock Trading
Stock investors may have learned the difference between a trade versus settlement date. Trades in the stock market aren’t immediate. Known as “T+2,” settlement happens two days after the trade happens, so the money and shares actually change hands two days later.
In the U.S., the Depository Trust & Clearing Corporation (DTCC) handles the majority of clearing and settling in equity trades. Owned by a financial consortium, the DTCC clears trillions in stock trades each day.
Clearinghouses in Derivatives Trading
Clearinghouses play a much more central and pivotal role in the derivatives market, since derivatives products are typically leveraged, so money is borrowed in order to make bigger bets. With leverage, the risk among counterparties in trading becomes magnified, increasing the need for an intermediary between buyers and sellers.
Prior to Dodd-Frank, the vast majority of derivatives were traded over the counter. The Act required that the world of derivatives needed to be made safer and required that most contracts be centrally cleared. With U.S. stock options trades, the Options Clearing Corp. is the biggest clearinghouse, while CME Clearing and ICE Clear U.S. are the two largest in other derivatives markets.
The Takeaway
Clearinghouses are financial intermediaries that handle the mechanics behind trades, helping to back and finalize transactions by members. But since the 2008 financial crisis, the ultimate goal of clearinghouses has been to be a stabilizing force in the marketplace. They sit in between buyers and sellers since it’s hard for one party to know exactly the risk profile and creditworthiness of the other.
For beginner investors, it can be helpful to understand this “plumbing” that allows trades to take place and helps ensure financial markets stay stable.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
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FAQ
What does a clearinghouse do?
Clearinghouses handle the clearing and settlement for trades on the markets. Clearing is the handling of trades after they’re agreed upon, while settlement is the actual transfer of ownership, or delivering an asset to its buyer and the funds to its seller.
What role do clearinghouses play in the markets?
Since the financial crisis in 2008 and 2009, clearinghouses largely play a stabilizing role, while also clearing trades.
What protections help stabilize the markets as it relates to clearinghouses?
Margin requirements and default funds provide layers of protection against financial instability.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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The permanent portfolio investment strategy involves creating an investment portfolio that is equally diversified among four asset classes. It was introduced by investment advisor Harry Browne in his 1981 book, Inflation-Proofing Your Investments. The goal of the permanent portfolio is for it to perform well during both economic booms and recessions.
It aims to provide both growth and low volatility. Historically the strategy has been successful. But engaging in the strategy requires a bit of legwork, like learning how to build the portfolio, and considering the pros and cons of the strategy.
Key Points
• A permanent portfolio strategy includes investments in U.S. stocks, Treasury bills, long-term Treasury bonds, and gold to form the four equally diversified asset classes.
• The strategy hopes to generate returns across different economic environments.
• The strategy was designed with the goal of achieving steady growth while maintaining low volatility.
• Annual rebalancing is necessary with the permanent portfolio to keep each asset class at a 25% allocation.
• The conservative nature of the permanent portfolio may result in lower returns compared to more stock-heavy portfolios.
What Is the Permanent Portfolio?
The permanent portfolio is diversified equally with precious metals, Treasury bills, government bonds, and growth stocks. The allocation is as follows:
Although these investments can be volatile and incur losses, their values are not strongly correlated, so by holding some of each, investors may be able to prevent significant losses. The idea is that at least one asset in the portfolio is always working. Each asset class tends to (but does not necessarily) perform well in different conditions:
• Stocks tend to perform well during times of economic prosperity and are good for growth.
• Gold tends to protect from currency devaluations, perform well during inflation, and do fine during growth periods.
• Bonds are a safe investment that perform well during deflationary times and do fine during growth periods.
• Cash might protect from losses during recessions and deflationary times, and is liquid.
Gold and bonds are generally safe havens during a recession and inflationary times, while the stock market provides growth during economic booms. Cash is stable and creates a source of funding for rebalancing and downturns.
Another way of looking at it is by categorizing the four asset classes into four economic conditions:
• Prosperity: Stocks perform well during prosperous times, as public sentiment is positively correlated to stock market increases.
• Inflation:Gold investments perform well during inflationary times because the purchasing power of the dollar decreases, so people flock to gold as a safe haven.
• Deflation: When the price of goods and services decreases, deflation occurs. Long-term bonds perform well in this environment because interest rates decrease, which increases the value of older bonds.
• Recession: Cash is good to hold during a recession while other assets are at a low. Investors can buy up assets while they’re down and still have some money on hand if they need it.
Rather than trying to time the market and moving funds around accordingly, the permanent portfolio is a simple set-it-and-forget-it strategy for long-term investing.
💡 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.
Historical Performance
The permanent portfolio has historically performed as it’s designed to. It grows steadily over time and doesn’t experience significant losses during market downturns. For example, during the 1987 market crash, utilizing the permanent portfolio would have only incurred losses of 4.5%, while a 60/40 portfolio would have dropped 13.4%.
In general, the permanent portfolio has a somewhat lower return than a 60/40 portfolio, but it carries less risk and volatility.
The permanent portfolio had an average annual return of 8.69% between 1978 and 2017, while the 60/40 portfolio earned 10.26%, and the 100% U.S. stock portfolio earned 11.50%. Within that time frame, the permanent portfolio outperformed the other two several times within five-year periods.
Note, of course, that historical performance is not indicative of future performance.
Pros of the Permanent Portfolio
There are several upsides to building a permanent portfolio:
• Simple, set-it-and-forget-it strategy. Once it’s set up, investors only need to rebalance their portfolio about once a year.
• Avoiding significant losses through diversification while gaining returns over time. The portfolio is designed to minimize volatility but still increase in value over the long term.
• Although assets such as stocks can grow significantly, they can also have significant downturns.
Cons of the Permanent Portfolio
Like any investment strategy, the permanent portfolio does come with some downsides:
• Stocks tend to grow more over time than the other assets included in the portfolio, so investors miss out on some of that growth by only having a 25% stock allocation.
• The permanent portfolio includes only U.S. stocks, so investors miss out on exposure to emerging markets and international stocks. When Browne developed the permanent portfolio, international stocks were not a popular investment, so he would not have included them in his allocation.
• Another potential con is that the permanent portfolio only includes Treasury bonds. Other types of bonds can also be good choices for diversification.
• Although cash is a fairly safe asset to hold during a depression, that type of downturn doesn’t happen often. By holding such a large amount of cash, investors miss out on growth opportunities.
• Overall, the permanent portfolio is fairly conservative, so investors could see higher returns using another strategy. Allocating more to stocks and alternative investments is likely to provide greater growth, but will carry greater risk.
💡 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.
Building a Permanent Portfolio
Although the permanent portfolio strategy outlines the percentage of funds to allocate to different asset classes, investors still need to select specific assets to invest in. For example, investors might choose individual stocks for their portfolio, or they might invest in ETFs that include solely U.S. stocks or bonds. The upside of ETFs is they are easy to buy and sell, they minimize fees, and they provide diversification.
Managing a permanent portfolio is fairly simple once it’s set up. It’s a good idea to rebalance the portfolio at least once a year to ensure that the 25% allocations remain the same. If one area of the portfolio has grown or declined, investors can rebalance to even them out.
The Variable Portfolio
Some investors may decide that the permanent portfolio is too safe for them and they’d prefer a strategy conducive to higher growth. Using the variable portfolio method, investors put 5% to 10% of their money into riskier or more experimental investments. That way, the majority of holdings are still in the steady growth permanent portfolio, but investors can play around with some alternative investments as well.
Alternatives to the Permanent Portfolio
Although the permanent portfolio has its merits and has performed well historically, it isn’t the right choice for everyone. Some investors might want to allocate more of their portfolio to stocks, while others might want to diversify into more types of assets. There are many investing strategies out there to choose from, or investors can create their own.
Just because a particular strategy has performed well in the past doesn’t mean it will continue to do so in the future. It’s important for investors to do their own research and due diligence to decide what works best for their own goals and risk tolerance.
Below are some of the most popular strategies:
60/40
The 60/40 strategy is popular, especially among retirees, because it has performed well over the past century.
It involves creating a portfolio with 60% stocks and 40% bonds. Similar to the permanent portfolio, the 60/40 gives investors exposure to the growth of the stock market while reducing risk and volatility with the inclusion of bonds.
The benefit of the 60/40 strategy compared to the permanent portfolio is that it has a large stock allocation, but some still consider the 40% bond allocation too high. There has also been discussion in recent years about whether the 60/40 portfolio will continue to be a successful strategy in the coming decades.
There are downsides, too, which include the fact that a 60/40 portfolio will likely not provide the same returns as one more invested in stocks. Depending on your specific investing goals, that’s something to keep in mind. It’s also possible that stock and bond values could decline at the same time, leading to a fall in the overall value of the portfolio.
Business Cycle Investing
Those looking for an intermediate-term strategy might want to use the business cycle investing strategy for some or all of their portfolio. Using this strategy, investors keep track of the business cycle and adjust their investments according to which stage of the cycle the nation is in.
Different industries and types of assets do better within each stage of the cycle, so investors can make predictions about when to buy and sell each asset and invest accordingly. To execute this strategy effectively, it is a good idea to have an understanding of past market contractions and their catalysts. This strategy requires more time, research, and effort than long-term, set-it-and-forget-it strategies, but can be successful for those willing to put in the work.
It could be unsuccessful if investors aren’t able to stay on top of the news and happenings related to the business cycle, and are able to readjust their holdings and allocations accordingly. It requires a more active approach, in other words, which may not be suited for each individual investor.
Rule of 110
Investors subtract their age from 110 to figure out what percentage of their money to allocate to stocks and bonds. For example, a 40-year-old would create a portfolio of 70% stocks and 30% bonds. As the investor gets older, they rebalance their portfolio accordingly.
Dollar-Cost Averaging
Here, investors put the same amount of money toward any particular asset at different points in time. Rather than putting all of their money into the markets at once, they space it out over time. Utilizing the dollar-cost averaging strategy allows investors to average out the amount they pay for that asset over time. Sometimes they buy low and sometimes they buy high, but they aren’t attempting to time the market or predict what will happen.
Lump Sum Investing
With the most basic strategy of all, investors put all of their available cash into the stock market right away. There’s no waiting for a particular time or trying to figure out what else to invest in. The theory behind this is that the overall trend line of the stock market continues to go up over the long term, even if it has downturns along the way. This might be a choice for investors who simply want to take advantage of stock market growth and aren’t afraid of volatility.
Alternative Investments
In addition to stocks and bonds, investors may want to consider diversifying into alternative investments, which could include real estate, franchises, or farmland. While some alternative investments carry a lot of risk and require research, they can also come with significant growth. Conversely, alternative investments tend to be very risky and speculative, and could see significant losses as well. The risks associated with alternative investments are something all investors should consider.
The Takeaway
The permanent portfolio involves equally allocating your investments to four specific asset classes. Those classes include precious metals, Treasury bills, government bonds, and growth stocks. While this method has proven beneficial for some investors in the past, it has its potential downsides, and won’t be the right strategy for everyone.
Once you’ve decided what your investing strategy is going to be and created some personal financial goals, you’re ready to start building your portfolio.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
How is the permanent portfolio allocated?
The permanent portfolio is diversified equally with precious metals, Treasury bills, government bonds, and growth stocks. Each asset class gets 25% within the permanent portfolio.
Who invented the permanent portfolio strategy?
The permanent portfolio strategy was introduced by investment advisor Harry Browne in his 1981 book, Inflation-Proofing Your Investments, with the goal of the permanent portfolio is for it to perform well during both economic booms and recessions.
What are some alternate strategies to the permanent portfolio?
Some potential alternatives to the Permanent Portfolio strategy that investors may check out include the 60/40 strategy, lump-sum investing, or the Rule of 110.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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When a consumer walks into a favorite store and spends money there, they might wonder if they should invest in that brand. Enter: retail stocks, or shares of companies that sell everything from clothing, books, computers, homeware, tools, groceries to auto parts.
It may feel like a good idea to invest in retail stocks because we’re familiar with their stores, the products, and understand the brand identities. However, retail investing can actually be tricky, especially in today’s ecosystem. Retail companies have dealt with a lot in recent years: shifting consumer preferences, the rise of online shopping, a slew of store closures, trade wars, a global pandemic that brought about quarantine measures.
Key Points
• Retail stocks represent companies selling various goods to consumers.
• Visits to retailers’ physical stores may offer insights into company health.
• Online sales often outpace in-store purchases, especially during holidays.
• Metrics like same-store sales, margins, and inventories are crucial for evaluating stocks.
• Retail stocks tend to be volatile and cyclical, influenced by economic conditions.
How to Invest in Retail Stocks
First, investors need to check to see if the retail company is public. Being public means shares of the business are available for any investor to buy in the stock market. They can do this by looking up the company’s stock ticker symbol on the internet or via their brokerage account. For those who just want exposure to the industry as a whole, they can find a retail-stock exchange-traded fund, or ETF.
Typically, retail companies go public in order to raise additional funds that are used to open more stores, expand overseas, invest in their e-commerce platform, or buy another retail company.
As a stockholder in a retail company, the investor holds a partial ownership, or a share, of the business. The owner of a stock is also entitled to dividends the company may disburse, and benefit from any potential increase in its share price. They also have the right to participate in shareholder votes.
Being a retail investor isn’t for the faint of heart. It takes a lot of due diligence. Investors should read quarterly earnings reports the company makes, monitor for any additional announcements the company makes related to company performance or new products, and pay attention to management changes like a new CEO or CMO.
It also takes an investor who isn’t afraid of a little volatility. Retail stocks can be particularly turbulent when reporting earnings for the back-to-school or holiday seasons — when many companies make a majority of their sales.
Remember back in the day when the mall was the place everyone went to hang out or go shopping? That reality has shifted radically with the advent of ecommerce. Consumers have increasingly migrated online to make their purchases, and retail companies have had to change alongside them.
Take holiday spending, the most important season for many retailers. Online spending has continued to outpace in-store spending, with the gap widening in recent years due to mobile spending.
In some cases, the e-commerce revolution has changed the stores along Main Street or malls into more of a marketing tool, rather than a first point of sale. Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store.
However, some digital-native brands have gone the opposite way, starting online and then opening physical stores. Examples include Warby Parker, Amazon, Allbirds, Skims, and Away, among others.
Looking at Retail Stock Metrics
Here are some ways investors can evaluate whether to invest in a public retail company:
• Visit a few physical locations. This way, an investor can get a sense of what’s happening on the ground. Is the store selling timely merchandise? Is the store well lit and laid out? Is there a lot of foot traffic? All of these are important ways an investor can try to gauge a company’s health.
• Visit the store’s online platform. If the store’s e-commerce operation seems strong, it is easy to navigate and offers customer service. This, too, points to the good health of a company.
• Next, it’s time to dig deeper into the company’s finances. Some measures that can be particularly helpful to retail investors include comparable store sales–also known as same-store sales. These are sales trends of stores that have been open at least one year.
• Also examine margins, or how much the revenues a company makes after subtracting the cost of goods sold (COGS), and inventories, or how much in goods the company has stocked. Too much inventory can signal slow sales, while too little may be a sign of operational or production issues down the road. These numbers may fluctuate depending on the season.
• Use traditional valuation metrics, such as price-to-earnings ratio or price-to-sales ratio. Public retail companies are required to report net income and revenue figures, which investors can use to gauge how expensive or cheap the shares are trading at.
Pay attention to broader industry trends by looking at earnings of competitors or changes in e-commerce trends. The National Retail Federation (NRF) could also be a good resource for information.
Possible Risks of Investing in a Retail Stock
Like all investments, retail stocks can come with risks. Take the global pandemic, which led to a quarantine across many cities in the world in 2020, causing consumers to be stuck at home and be wary of visiting stores.
Here are some of the other ways the industry can be vulnerable:
• Retail stocks can be highly cyclical, or tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink. Investors may benefit from balancing their portfolio with non-cyclical companies, like utility, telephone or health-care stocks.
• Retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain.
• Retail stocks are also often at risk of consolidation. The retail industry is shrinking in some ways, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.
Retail businesses can be volatile stock investments, going up and down with the seasons, along with changes in consumer confidence. Furthermore, the e-commerce and mobile phone revolution has added pressures to the retail financial landscape.
Investing in retail stocks involves keeping tabs on how brands are dealing with shutting malls, building digital platforms and changing expectations among consumers. Investors can also benefit from understanding more retail-specific metrics like same-store sales, margins and inventories. They can also use traditional valuation measures like P/E or P/S ratios.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What are retail stocks?
Retail stocks are shares of retail companies, which could include brands or chains that sell consumer products in physical locations or online. Examples of retail products include sporting goods, food, books, hardware, and more.
What are some risks involved with retail stocks?
Investing in retail stocks involves risks such as the cyclical nature of the retail industry, potential for changing regulations, and risks of consolidation.
What are some ways to invest in retail companies?
Investors can buy shares of retail companies, or even ETFs or index funds that are focused on the retail sector. There may be other ways to invest, too, such as through corporate bonds.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Stock exchanges and financial regulators sometimes impose different types of trading restrictions on individual stocks, including short-term halts or delays, and occasionally longer-term suspensions.
In cases of unusual volatility, financial authorities may halt the trading of all securities, by using a fail-safe measure known as market-wide circuit breaker (MWCB).
Generally speaking, though, more common reasons for trading restrictions include mitigating the impact of company news that could impact a stock’s price, significant economic or global events that impact that security (or the market as a whole), or because there’s a technical problem impacting trades.
The Securities and Exchange Commission (SEC) can restrict the trading of a particular security for up to 10 days, often because the company hasn’t filed the requisite reporting documents.
These trading restrictions can impact listed stocks (those listed on U.S. stock exchanges), as well as over-the-counter (OTC) stocks, which are not traded on public exchanges.
Key Points
• Stock exchanges and regulatory bodies may have reason to impose short- or long-term trading restrictions under various conditions.
• A short-term trading halt usually lasts no more than an hour, and is resolved during the trading day. A delay is usually a brief pause before markets open.
• The SEC can impose a trading suspension for up to 10 days.
• A common reason for a trading suspension is that a company hasn’t maintained its regular reporting to the SEC.
• A trading halt may be applied to a single security or market sector, but a full interruption of trading across markets is also possible.
What Is the Difference Between a Trading Halt and a Trading Restriction?
A trading halt is a short-term pause in which the trading of a particular security is temporarily suspended. These are known as regulatory halts. While a trading halt may occur at any point during the trading day, a trading delay is usually imposed at the market’s open.
A trading suspension is a longer-term restriction on trading a certain security, up to 10 days, enforced by the SEC.
For listed stocks, trading halts and delays are typically put in place by stock exchanges themselves, usually in response to company news that could impact trading outcomes.
OTC stocks, which are not listed on traditional exchanges like the NYSE or Nasdaq, are regulated by FINRA. So FINRA would institute a halt or delay if there were a material reason to pause trading.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
What Is a Trading Halt or Delay?
A trading halt pauses trading for a short period of time, usually less than an hour. Typically the halt occurs in response to company news or announcements affecting a product, company leadership, or other significant news that could change a stock’s price positively or negatively.
A stock exchange can also interrupt trading of a certain security if it deems that the stock does not meet, or no longer meets the criteria for being listed on the exchange.
A trading delay can be imposed by an exchange when a company has revealed significant news after the trading hours of 4 p.m. to 9:30 a.m. Eastern Time — which is often when companies make important announcements.
The idea is to give investors time to absorb the news, and ideally avoid volatile trading.
When an exchange imposes a halt on a certain security, other exchanges that list that stock also respect the halt or delay.
Trading halts are artificial, meaning they are not a natural part of markets — however, they have been in existence for some time. Stock market halts date back to 1987, when the SEC mandated the creation of market-wide circuit-breakers (MWCBs) to prevent a repeat of the Oct. 19, 1987 market crash, also known as “Black Monday,” which was one of the worst days in the history of the stock market.
Reasons for Trading Halts
Trading halts are a means of interrupting market action to prevent volatility from snowballing in response to unexpected stimuli. Halts are implemented for a variety of reasons, including the following.
1. Anticipation of a Major News Announcement
A trading halt might be called during the day to allow a company to make an announcement. As noted, if the announcement is pre-market, it might result in a trading delay rather than a halt, prior to the market’s open. A trading halt or delay allows investors time to absorb the news without reacting.
2. Severe Price Fluctuations
Exchanges may also impose trading halts based on stock volatility, applying to both upside and downside swings in short amounts of time. Whereas news-induced trading delays could be an hour in duration, trading of a certain stock can also be halted when price fluctuations trigger the Limit Up/Limit Down Plan (LULD).
The LULD parameters are designed to halt trading when a stock’s price moves too quickly outside certain price bands. These bands are calculated on a rolling basis, to capture higher- or lower-than-average price movements over five-minute intervals. If a stock enters the so-called limit state (i.e., it hits either the upper or lower end of its range), and doesn’t move within 15 seconds, trading is paused for five minutes.
3. Market-Wide Circuit Breakers
There are also three tiers of market-wide circuit breakers that pause trading across all U.S. markets when the benchmark indices the S&P 500, the Dow Jones 30, and the Nasdaq exceed pre-set percentages in terms of price from the prior day’s closing price:
• Level 1: 15-minute halt when the S&P 500 falls 7% below the previous day’s closing price between 9:30 am ET and 3:24 pm ET.
• Level 2: 15-minute halt when the S&P 500 falls 13% below the previous day’s close between 9:30 am ET to 3:24 pm ET. Level 1 and 2 circuit breakers do not halt trading between 3:25 pm ET and 4:00 pm ET.
• Level 3: Trading is closed for the remainder of the day until 4 pm ET when the S&P 500 falls 20% below the previous day’s close.
4. Correct an Order Imbalance
Non-regulatory halts or delays occur on exchanges such as the NYSE when company news — particularly when released after hours — has a disproportionate impact on the pending buy and sell orders.
When this occurs, trading is halted or delayed, market participants are alerted to the situation, and exchange specialists communicate to investors a reasonable price range where the security may begin trading again on the exchange.
However, a non-regulatory trading halt or delay on exchange does not mean other markets must follow suit with this particular security.
Trading is halted when it’s determined that unusual market activity such as the misuse or malfunction of an electronic quotation, communication, reporting, or execution system is likely to have a significant impact.
6. Regulatory Concerns
A trading halt may be placed on a security when there is uncertainty over whether the security meets the market’s listing standards. When this halt is placed by a security’s primary markets, other markets that offer trading of that security must also respect this halt. These include:
• SEC Trading Suspension: A five-minute trading halt for a stock priced above $3.00 that moves more than 10% in a five-minute period. These are commonly imposed by the SEC onto penny stocks and other over-the-counter stocks suspected of stock promotion or fraud.
• Additional Information Requested: A trading halt that occurs when a stock has rallied significantly without any clear impetus. This can be common among orchestrated pump-and-dumps or short squeezes. In many cases when the halt is lifted, the stock reverts back down because there are no underlying fundamentals supporting the dramatic rise in price.
💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
How Long Do Trading Halts Last?
Trading halts are typically no longer than an hour, the remainder of the trading day, or on rare occasions up to 10 days. However, if the SEC deems appropriate, the regulatory body may revoke a security’s registration altogether.
Example of Trading Halts
While most trading halts don’t make headlines, there are a few that investors may remember.
Pending News
In February of 2025, medical device company Know Labs, Inc. (KNW) announced that its trading suspension had been lifted by NYSE American. The trading suspension had been imposed on the company’s common stock, owing to the company’s need to meet compliance standards for listing on the NYSE American exchange (in this case the stock price was found to be above the low-selling threshold for listing on the exchange).
Stock Volatility
Amid the well-known Gamestop vs Wall Street meme stock spectacle in 2021, Gamestop’s stock (GME) saw huge capital inflows over the course of a couple of weeks, leading the NYSE in terms of daily volume. The stock’s intraday volume was so high that it triggered the volatility circuit breaker dozens of times over the last week of January and again on February 2, 2021, when it dropped 42%.
Technical Issues
In early June of 2024, the trading of some 40 ticker symbols on the NYSE, including Berkshire Hathaway Class A shares, were temporarily halted owing to pricing data issues that stemmed from a technical glitch attributed to a new software release. Trading resumed after a couple of hours.
Market-wide Circuit Breakers (MWCBs)
MWCBs were triggered four times in March 2020 in response to the global COVID-19 pandemic lockdowns that caused two of the six largest single-day drops in market history. This was the first occurrence of market-wide circuit breakers since 1997.
The Takeaway
Trading halts, delays, and suspensions are similar, but halts and delays are generally shorter — and are the result of intervention by a stock exchange or FINAR. Trading suspensions are generally put in place by the SEC.
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FAQ
Is a trading halt a good thing?
Generally speaking, the intention of a trading halt is to protect investors, as well as companies, from the impact of significant news events on a stock’s price — or if there’s evidence of non-compliance, fraud, or technical issues. In rare cases, an exchange may halt trading when there’s a major event, such as a natural disaster.
What happens when trading is halted?
A typical trading halt occurs during the course of the trading day (usually 9:30 a.m. to 4 p.m. Eastern Time). This is a temporary interruption of the trading of a single security, and usually it lasts no more than an hour. It may follow a company news announcement, or it may occur after news is released.
What’s the difference between a halt and a suspension?
A trading halt is a temporary pause relating to company news (or factors that could lead to market volatility), and it’s imposed by a stock exchange or by FINRA (in the case of over-the-counter stocks). A suspension is longer-term — up to 10 days — where a stock is removed from trading owing to non-compliance with SEC rules or other regulatory issues.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.
Investing in individual bonds can be complicated, but exchange-traded funds (ETFs) that invest in bonds — or bond ETFs — can provide a more straightforward way to invest in fixed-income securities. Investors may associate ETFs with stocks, thanks to the popular ETFs that track stock indices like the S&P 500. ETFs also happen to trade on stock exchanges, like the New York Stock Exchange.
Bond ETFs work similarly. Though the ETF holds bonds and not stocks, it trades on a stock exchange. Said another way, a bond ETF is a bundle of bonds that an investor can trade like a stock. Bond ETFs make it possible for investors to buy a diversified set of bonds, without the time and effort it would take to build a portfolio of individual bonds.
Key Points
• Bond ETFs give investors access to multiple bonds with smaller investments, enhancing diversification.
• Bond ETFs trade on stock exchanges, offering accessibility and liquidity.
• Types of bond ETFs include Treasury, municipal, corporate, and asset-backed bonds.
• Risks involve real-time price changes and potential loss of value.
• The real-time fluctuations of bond ETFs can lead to impulsive investor decisions.
ETF 101: Reviewing the Basics
Before getting into the specifics of bond ETFs, it will be helpful to understand ETFs and bonds separately. Let’s begin with ETFs.
An investment fund provides a way to pool money with other investors so that money can then be spread across many different investments (sometimes referred to as a “basket” of investments).
For most retail investors, it would be too costly to individually purchase 500 individual stocks or 1,000 individual bonds. But such a thing becomes possible when doing it alongside thousands of other investors. Though different vehicles, mutual funds and ETFs provide investors with an incredible opportunity to diversify their investments.
For retail investors, investment funds come in two major varieties: mutual funds and exchange-traded funds. Mutual funds and ETFs are constructed differently — ETFs were built to trade on an exchange, as the name implies — but both can be useful tools in gaining broad diversification.
Whether investors will choose a mutual fund or ETF will likely depend on their preference, and context. For example, someone using a workplace retirement plan may only have access to mutual funds, so that’s what they use.
Someone who is investing independently may choose ETFs since ETFs tend to have lower fees than mutual funds.
Whether an investor is using a mutual fund or an ETF, what’s most important is what’s held inside that fund. Think of an ETF as a basket that holds an array of securities, like stocks or bonds.
Most ETFs will hold just one type of security — only stocks or only bonds, for example. A bond ETF could be broad, or it could contain a narrower sliver of the bond market, like corporate bonds, green bonds, or short-term treasury bonds.
What Is a Bond?
Effectively, a bond is a loan to an organization: i.e., a company, government, or other entity. Investors loan the entity their money, and then the entity pays interest on the amount of that loan.
There are many types of bonds. Treasuries are loans to the U.S. government. Municipal bonds are loans to a state or local government. Companies sometimes issue bonds in order to raise money. These entities are borrowing money from investors and issuing IOUs in the form of bonds.
How Bonds Work
When investors buy a bond, they are agreeing to the rate of interest and other terms set by the bond. Because bonds pay a fixed rate of interest, bonds are sometimes referred to as fixed-income investments.
Bonds typically make interest payments, sometimes referred to as coupon payments, twice annually.
Example of a Bond
Let’s say an investor buys a Company X bond for $10,000 that pays a 4% rate of interest over 20 years. The bond earns $400 every year, earning the investor a total of $8,000 over the 20-year period. At the end of the period, the $10,000 “principal” investment is returned. As long as the investor holds the bond for the full 20 years, there should be no surprises.
Because bonds pay a fixed rate of return, their earnings potential is largely predictable. But there is limited upside on what can be earned on a bond. For this reason, bonds are considered to be a safer, less volatile complement to stock holdings, which have a higher potential for returns over time.
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Types of Bonds
Bonds are issued by different entities and are often categorized by the issuer. There are four categories of bonds available to investors.
• Treasury bonds: Bonds issued by the U.S. government.
• Municipal bonds: Bonds issued by local governments or government agencies.
• Corporate bonds: Bonds issued by a public corporation.
• Mortgage and asset-backed bonds: Bonds that pass through the interest paid on a bundle of debts, such as a bundle of mortgages, student loans, car loans, or other financial assets.
There are also many subtypes within these broad categories.
When it comes to risk, the bond market comprises a wide range. Corporate, municipal, and asset-backed bonds are generally considered to be higher-risk than treasury bonds.
Whereas a business or even a municipal government could potentially “default” on a loan, it is highly unlikely that the U.S. government would go bankrupt. (As yet, the U.S. government has never defaulted on a treasury bond.)
Because they are considered low risk, U.S. treasury bonds typically pay less interest than the other bond types. This is an important trade-off to understand. Higher-risk investments should pay a higher rate of interest in order to compensate the investor for taking on that additional risk.
This is why it is possible to see bonds with high rates of interest issued by unstable governments or by highly speculative companies. These are often referred to simply as high-yield bonds or junk bonds.
Bonds can also vary by their maturity dates. It is possible to purchase bonds with a wide range of timelines, ranging from the very short (a few days) to the very long (30 years). Although it depends on the current state of interest rates, long-term bonds tend to pay more than short-term bonds. This should make intuitive sense; investors want to be compensated for locking their money up for longer periods.
Benefits of Bond ETFs
While bonds offer certain benefits to investors, including relatively low risk and predictable income, these instruments are complex. Owning and managing a portfolio of bonds requires experience and sophistication. This is where bond ETFs come in. In some ways, bond ETFs give retail investors easier access to the bond market.
Bond ETFs Can Be Purchased in Small Dollar Amounts
For some bonds, the starting price is $1,000. This can be prohibitive for small investors who don’t have $1,000 to start building their bond portfolio, let alone a diversified one.
Generally, ETFs are sold by the share, and the cost of one share varies by ETF. Some trading platforms allow for the purchase of partial shares, which allows investors to get started with as little as $1.
Bond ETFs Can Provide Diversification
It is possible to buy into a fund of hundreds or thousands of bonds using a bond ETF. This type of portfolio diversification would be otherwise impossible to achieve for small investors trying to build a bond portfolio on their own. ETFs make diversification a possibility, even at very small dollar amounts.
Bond ETFs are Typically Low-Cost
ETFs, by their nature, are low-cost. Because they are typically passive funds by style, the management fee embedded within the fund — called the expense ratio — is typically quite low. Compare this to an actively managed mutual fund of bonds, where the expense ratios can top 1%.
There’s another fee that investors will want to be aware of, called a trading cost or transaction fee. This is the cost of buying and selling ETFs (and stocks). These fees can be quite prohibitive for retail investors. Luckily, there are ways to buy ETFs without paying any trading or transaction fees.
Bond ETFs are Liquid
Individual bonds are not always easy to buy and sell. Said another way, they are not particularly liquid. Bonds do not trade on an open exchange, like stocks and ETFs. It is likely that an investor would need to involve a professional to broker the transaction.
ETFs, on the other hand, are very easy to sell. Most banks and trading platforms allow investors to do it themselves, online. This way, an investment can be sold quickly if needed.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
Downsides of Bond ETFs
Bond ETFs do have their downsides, however.
Bond ETFs reveal underlying price changes in the bonds, which some investors may find disconcerting. Because yes, it is possible for bonds, and a bond ETF, to lose value.
When holding an individual bond or a portfolio of bonds, an investor is not provided minute-by-minute updates of the market value of that investment. In this way, a bond is like a house. There is no ticker sitting above anyone’s house that tells them the value of that property at any given time.
This is not the case with a bond ETF, where price changes can be felt in near real time. It will be important that investors are prepared for this. It is generally not wise to make a decision about long-term investments based on recent price gyrations, not just with stocks but with bonds, too.
The Takeaway
The first step is to research bond ETFs, as there are many kinds. Bond ETFs can be broad and cover a wide sample of the bond market, or they can be narrower. For example, it is possible to buy a long-term treasury bond ETF or a bond ETF that only holds certain municipal bonds.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
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FAQ
What is a bond ETF?
A bond ETF is an exchange-traded fund that invests in, or is composed of, bonds, rather than stocks or other types of securities.
What are some examples of types of bonds?
There are numerous types of bonds, and some examples include Treasury bonds (or T-bills), municipal bonds, corporate bonds, and mortgage or asset-backed bonds.
What are some potential advantages to bond ETFs?
Potential advantages of bond ETFs include the fact that they can be purchased in small dollar amounts, they can help diversify a portfolio, and are relatively liquid. That doesn’t mean that there aren’t drawbacks, however.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
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