So Where Are OTC Securities Traded, Exactly?

In the US, the majority of over-the-counter trading takes place on networks operated by OTC Markets Group. OTC Markets Group organizes OTC stocks and securities into three distinct markets: OTCQX, OTCQB, and Pink Sheets.

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Q: What Are Over-the-Counter (OTC) Stocks?

Over-the-counter stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network.

Q: What Kind of Securities Trade on the Over-the-Counter Market?

OTC trading tends to focus on equities, i.e. stocks. Other types of investments that can be traded OTC include: derivatives, corporate bonds, government securities, foreign exchange (Forex), commodities, and cryptocurrencies.

Mar

2025

What Are Over-the-Counter (OTC) Stocks?

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

Over-the-counter (OTC) stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network. Additionally, the over-the-counter market can also include other types of securities. The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading.

For investors, it can be important to understand the meaning of OTC stocks, and where these securities might fit into your portfolio before trading them.

What Are OTC Stocks?

As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. As such, in order to grasp OTC stock trading and how it works, it helps to have a clear understanding of public stock exchanges.

A stock exchange — like NYSE or Nasdaq — is a regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange (for example, a company that wants to be listed on the Nasdaq must meet the Nasdaq listing requirements).

Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but have since been delisted.

Also, stocks that are traded on an exchange are called “listed stocks,” while those that trade OTC are often called “unlisted stocks.”

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How to Buy OTC Stocks

Investors interested in purchasing OTC stocks may not need to change their investing strategy much, because depending on the exchange or platform they use to buy listed investments, they may be able to buy OTC stocks in much the same way.

Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks. This can be done by searching for the OTC stock on the platform and placing an order. Investors may need to know the specific stock ticker they’re looking for, however, so there may be a bit of initial homework involved.

Types of OTC Securities

OTC trading tends to focus on equities, i.e. stocks. In fact, it’s even common to see penny stocks being traded over the counter, or used as a common example of an OTC security. But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:

• Derivatives

• Corporate bonds

• Government securities

• Foreign currency (forex)

• Commodities

Altogether, there are thousands of securities that trade over the market. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on U.S. exchanges). Companies that trade over the counter may report to the SEC, though not all of them do.

Types of OTC Markets

In the U.S., the majority of over-the-counter trading takes place on networks operated by OTC Markets Group. This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.

OTC Markets Group organizes OTC stocks and securities into three distinct markets:

• OTCQX

• OTCQB

• Pink Sheets

OTCQX

OTCQX is the first and highest tier, and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records.

Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.

OTCQB

The middle tier is designed for companies that are still in the early to middle stages of growth and development. These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements, and not be in bankruptcy.

Pink Sheets

The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange.

Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.

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Pros and Cons of OTC Trading

Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they’re able to produce above-average returns.

When considering OTC stocks, it’s important to understand how the positives and potential negatives may balance out — if at all. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.

Trading OTC Stocks: Pros and Cons
OTC Stock Trading Pros	OTC Stock Trading Cons
Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO.	Micro-cap stocks and nano-cap stocks that trade over the counter may lack a demonstrated track record of positive performance.
Investing in penny stocks can allow you to take larger positions in companies.	Taking a larger position in a penny stock could amplify losses if its price declines.
May appeal to active traders who are more interested in current pricing trends than fundamentals.	Limited information can make it difficult to assess a company’s financials and accurately estimate its value.
Trading cryptocurrency on an OTC exchange could help minimize hacking or security risks.	OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from being listed on a public exchange.	OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position.

The Takeaway

OTC stocks are those that trade outside of traditional exchanges. Since OTC stocks trade outside of traditional exchanges like the NYSE or Nasdaq, the OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency.

If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on and how much money you’re willing to invest. Having a baseline for both can help you to manage risk and minimize your potential for losses.

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FAQ

How do OTC stocks differ from stocks listed on major exchanges?

The primary difference between OTC stocks and stocks listed on major exchanges is exactly that: OTC stocks aren’t not listed on major U.S. stock exchanges. They can still be traded, however, but how they’re listed (or not listed) is the primary differentiator.

How can I buy or sell OTC stocks?

Many investors can use their preferred brokerage or platform to buy and sell OTC stocks. Not all brokerages or investment platforms allow investors to do so, but many do, and trading them often involves searching for the appropriate ticker and executing a trade.

Are there any specific regulations or reporting requirements for OTC stocks?

There are reporting standards for OTC stocks, but those standards are not as stringent as listed stocks. Depending on the OTC market on which an OTC stock trades, more or less reporting may be required.

What are the main factors to consider when researching OTC stocks?

Investors should consider many factors in the OTC market, but among them are volatility, liquidity and trading volume, and applicable regulations. These three factors may have the biggest impact on how an OTC stock performs going forward, though that’s not guaranteed.

Are there any restrictions or limitations on trading OTC stocks?

Not really, other than an exchange, brokerage, or platform perhaps not allowing users or investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/JohnnyGreig

SoFi Invest®

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Mar

2025

NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

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

Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

Key Points

• Net Present Value (NPV) measures the difference between the present value of cash inflows and outflows over time.

• Calculating NPV helps determine the profitability of investments or projects by considering future cash flows and a discount rate.

• The NPV formula incorporates the time value of money, emphasizing that money now is worth more than the same amount in the future.

• A positive NPV indicates that the earnings from an investment are expected to exceed the cost.

• NPV is used in capital budgeting to assess the return on project investments before committing funds.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

• List future cash flows for each year you expect to receive them.

• Calculate the present value for each cash flow.

• Add all present values for future cash flows together.

• Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)^N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

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Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

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How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

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FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

About the author

Rebecca Lake

Photo credit: iStock/Sanja Radin

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Mar

2025

Guide to Morningstar Ratings

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

Morningstar is a highly regarded financial services firm whose mission revolves around providing investors with the research and tools, including Morningstar ratings, they need to make informed decisions in their portfolios.

Those tools, used by individual investors as well as institutional investors and financial advisors, include Morningstar fund ratings, which can help investors gauge how well various mutual funds and exchange-traded funds (ETFs) have performed over time.

What are Morningstar Ratings?

In simple terms, the Morningstar ratings system is a tool investors can use to compare financial securities such as mutual funds and ETFs. And if you’re wondering whether Morningstar ratings are legitimate, the answer is yes. Even FINRA, the Financial Industry Regulatory Authority, uses Morningstar ratings.

Morningstar reviews of mutual funds and ETFs reflect different metrics, depending on which ratings system is being applied. The main Morningstar ratings investors may turn to learn more about a particular investment are the Star Ratings and Analyst Ratings. (Morningstar also has a separate ratings system for individual stocks.)

These ratings can be helpful to investors for a variety of reasons — whether they’re trying to diversify their portfolio, or some research into socially responsible investing, and trying to find securities that fit their strategy.

How Morningstar Ratings Work

As Morningstar itself describes, the ratings system uses a methodology based on specific categories and risk-adjusted return measures. The company will only rate a fund that’s been around for more than three years. Morningstar also updates its ratings on a monthly basis.

You can use these ratings to select from the funds available in your 401(k), or to decide which funds to add to an IRA or a taxable brokerage account.

Recommended: Investing in Growth Funds

The “Star Rating” Explained

The Morningstar Star Rating system, more simply referred to as star rating, is a quantitative ranking of mutual funds and ETFs. Introduced in 1985, the star rating looks backward at a fund’s past performance, then assigns a rating from one to five stars based on that performance.

As mentioned, Morningstar reviews ETFs and mutual funds with a record of more than three years, so newer funds do not receive a star rating until they’re reached this milestone. The rating methodology utilizes an enhanced Morningstar risk-adjusted return measure. Specifically, the star ratings system looks at each fund’s three-, five-, and 10-year risk-adjusted returns.

Star ratings can serve as a report card of sorts for comparing different funds, based on how they’ve performed historically. The Morningstar ratings are not forward-looking, as past performance is not a foolproof indicator of future behavior. But investors can use the ratings system as a starting off point for conducting fund research when deciding where to invest.

If you’re looking for a tool to help you compare mutual funds or exchange-traded funds at a glance based on past performance, the star rating system can help.

The “Analyst Rating” Explained

The Morningstar Analyst Rating takes a different approach to ranking funds and ETFs. Instead of looking backward, the qualitative analyst rating looks forward to assess a fund’s ability to outperform similar funds or a market benchmark. Rather than using stars, funds receive a rating of Gold, Silver, Bronze, Neutral or Negative, based on the analyst’s outlook for performance.

The firm does not update analyst ratings as frequently as star ratings. Morningstar reviews for analyst ratings are reevaluated at least every 14 months. The firm typically assigns analyst ratings to funds with the most interest from investors or the most assets.

When ranking funds, analysts look at three specific metrics:

• People

• Process

• Parent

Performance is also taken into account within the People and Process pillars. In order to earn a Gold, Silver or Bronze rating, an analyst must determine that an active fund can beat its underlying benchmark when adjusted for risk.

Generally speaking, these Morningstar reviews go into more detail, in terms of the analysis, ranking, and comparison of funds. If you’re an active trader or a buy-and-hold investor you might use the Morningstar analyst ratings to get a feel for what a particular mutual fund might do next, which can be helpful when an investor is, for example, trying to pick an ETF.

How Morningstar Measures Volatility

Morningstar uses a few key volatility measurements as it aims to minimize risk and maximize returns through strategic diversification. Chief among those measurements are standard deviation, mean, and the Sharpe ratio.
It’s a somewhat complicated process, but using these three measurements in tandem helps Morningstar get a handle on volatility and make appropriate ratings decisions.

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Example of a Morningstar Rating

Morningstar star ratings are free to access for investors on the company’s website, and it’s relatively easy to find plenty of examples of Morningstar ratings on the platform. For instance, to find a star rating for a particular fund or ETF you’d simply search for it using its name or ticker symbol. You can also view Morningstar ratings and picks for funds by category, such as small-cap funds or U.S. index funds.

Here’s an example of a Morningstar rating for the Calvert International Responsible Idx I fund (CDHIX). This fund, which is in the foreign large-blend category and is an index fund, has a four-star rating from Morningstar. You can see at a glance that the fund has an expense ratio of 0.29%, a minimum investment of $100,000 and just over $867 million in assets, as of August 2023.

Are Morningstar Ratings Accurate?

Morningstar fund ratings are designed to be a guide to use as you invest, rather than the absolute word on how well a fund is likely to perform. That’s to say that there’s always going to be risk involved when investing, so don’t expect any rating to be a sure-thing.

So, how well do Morningstar ratings perform over time and are they an accurate guide for investing?

According to Morningstar’s own analysis of its ratings system, the star ratings can be a useful jumping-off point for investors. That analysis resulted in three key findings:

• Funds with higher star ratings tend to have lower expense ratios and be cheaper for investors to own

• Higher rated funds tend to be less volatile and experience less dramatic downward swings when the market is in flux

• Funds that received higher star ratings tended to produce higher returns for investors compared to funds with lower ratings

The analysis didn’t look specifically at how star ratings and fund performance aligned through different bull and bear markets. But the ultimate conclusion Morningstar drew is that the Star Ratings tend to steer investors toward cheaper funds that are easier to own and stand a better chance of outperforming the market.

Use Expense Ratios

According to Morningstar, fees are one of the best predictors of future performance, at least for Star Ratings. For funds and ETFs, that means it’s important to consider the expense ratio, which represents the cost of owning a fund annually, calculated as a percentage of fund assets.

Actively managed funds typically carry higher expense ratios, as they require a fund manager to play an important role in selecting fund assets. Passively managed funds and ETFs, on the other hand, often have lower expense ratios.

So which one is better? The answer is that it all comes down to performance and returns over time. A fund with a higher expense ratio is not guaranteed to produce a level of returns that justify higher fees. Likewise, a fund that has a lower expense ratio doesn’t necessarily mean that it’s a poor investment just because it’s cheaper to own. Morningstar’s research found that the average one-star fund cost significantly more than the average five-star fund.

As you do your own research in comparing funds and ETFs, consider both performance and cost. This can help you find the right balance when weighing returns against fees.

How Should Investors Use Morningstar Ratings?

How much do Morningstar ratings matter in the grand scheme of things? The answer is, it depends on what you need from investment research tools.

Morningstar reviews of mutual funds and ETFs can be helpful for comparing investments, especially if you’re just getting started with the markets. Morningstar is a respected and trusted institution and both the Star and Analyst Ratings are calculated using a systematic approach. The reviews aren’t just thrown together or based on a best guess.

They’re designed to be a guide and not a substitute for professional financial advice. So, for instance, you may use them to compare two index funds that track the same or a similar benchmark. Or you may use them to compare two ETFs that are representative of the same market sector.

Risks of Morningstar Ratings

Morningstar Ratings are not an absolute predictor of how a mutual fund or ETF will perform in the next five minutes, five days, or five years. After all, there’s no way to perfectly predict how any investment will perform as the market changes day to day or even minute-to-minute.

One risk to avoid with Morningstar ratings is relying on them solely as your only research tool and not doing your own independent research. Again, that means checking expense ratios as well as looking at the underlying assets of a particular fund and its investment strategy (i.e. active vs. passive) to determine how well it aligns with your goals and risk tolerance.

Looking only at Morningstar reviews without doing your own due diligence could cause you to invest in funds that aren’t the best fit for your portfolio. Or you may overestimate how well a fund will perform, only to be disappointed later. For those reasons, it’s important to look under the hood, so to speak, to ensure that you fully understand what you’re investing in before buying in.

Morningstar Ratings for Funds

As discussed, Morningstar’s rating system mostly focuses on funds, including index funds, mutual funds, and ETFs. The company also has a ratings system for individual stocks, but its bread and butter is its focus on funds. And, as a quick refresher, it uses a data-driven, quantitative methodology for determining those rankings.

Also, as it bears repeating, a good Morningstar rating does not mean that an investment is risk-free.

Other Investment Risk Rating Providers

Morningstar is just one of many companies that offers investment ratings. An internet search will likely yield many results. But it’s a list that includes many familiar names, such as Bloomberg, Nasdaq Market Data Feeds, S&P Global Market Intelligence, MarketWatch, Thomson Reuters, and others.

Trading Stocks With SoFi

Having research tools can help you make educated decisions about where and how to invest. Morningstar Ratings are one tool you can use. When you’re ready to invest and apply the knowledge you’ve acquired, the next step is opening an online brokerage account. But keep in mind that there are many ratings services on the market, and that Morningstar’s ratings are far from the only research tool out there.

It’s also important for investors to keep in mind that all investments involve risk, whether they’re highly-rated or not. Be sure to do your due diligence before investing, but know there’s always a chance that things could turn sour on you.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How reliable are Morningstar ratings?

Morningstar ratings are generally considered to be high-quality in the financial industry, but that doesn’t mean that its ratings are always spot-on. All investing involves risk, and even a high rating doesn’t guarantee that an investment will pan out.

Is a Morningstar rating of “5” good?

Morningstar uses a scale of one to five “stars” to rate investments, with five stars being the highest, or best-quality investment. So, yes, a five-star rating is generally considered good, although not risk-free.

About the author

Rebecca Lake

SoFi Invest®

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

Mar

2025

NASDAQ Listing Requirements Explained

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

Before a stock can be traded by investors, it must first be listed on an exchange. Different stock exchanges can have physical locations with in-person trading or be entirely electronic. After the New York Stock Exchange (NYSE), the Nasdaq is the second largest stock exchange in the world.

Not just any company can be listed for trading on the Nasdaq, however. There are specific Nasdaq listing requirements that must be met as a condition of inclusion. These rules are designed to ensure that only reputable companies can trade on the exchange.

Understanding Nasdaq listing rules and how a stock exchange works can be helpful when mapping out an investing strategy and determining which stocks to purchase. Because exchanges play such an important role in stock listings, these requirements can also serve as a tech IPO guide for investors.

Here’s a closer look at how the Nasdaq works and what’s required for a company to be listed on the exchange.

What is the Nasdaq?

The Nasdaq play an important role in the history of the stock market. It’s an electronic stock exchange founded in 1971 by the National Association of Securities Dealers. Nasdaq is an acronym for National Association of Securities Dealers Automatic Quotations.

In terms of how many companies are on Nasdaq, the exchange lists approximately 5,000 common stocks. Those stocks represent a diverse range of industries, including financial services, health care, retail and tech stocks.

In addition to identifying the stock exchange itself, the term “Nasdaq” can also be used as shorthand when referencing the Nasdaq Composite Index. This stock market index tracks the performance of approximately 3,000 stocks listed on the Nasdaq exchange.

The Nasdaq Composite is a capitalization-weighted index, meaning its makeup is determined by market capitalization. Market cap is a measure of a company’s value as determined by its share price multiplied by the total number of outstanding shares. The Nasdaq Composite includes some of the largest U.S. companies by market cap.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Nasdaq Listing Requirements

The Nasdaq doesn’t include every publicly traded company in the U.S. In order to be included on the exchange, companies must first meet Nasdaq listing rules. These rules apply to companies that are seeking to have common stocks on the exchange.

Nasdaq listing requirements span a number of criteria:

•  Earnings
•  Cash flow
•  Market capitalization
•  Revenue
•  Total assets
•  Stockholders’ equity
•  Bid price

The Nasdaq listing rules allow companies to qualify under one of four sets of standards, based on the criteria listed above.

Standard 1: Earnings

A company’s earnings are a reflection of its profitability. To qualify for listing on the Nasdaq based on earnings alone, a company must be able to show:

•  Aggregate pre-tax earnings of $11 million or more for the three prior fiscal years
•  Earnings of $2.2 million or more for the two most recent fiscal years
•  Zero net losses for each of the three prior fiscal years

For a company to be included under this standard, they have to be able to check off all three of these boxes. If they can meet two criteria but not a third, they won’t be able to qualify for listing.

Standard 2: Capitalization with Cash Flow

Capitalization is a measure of a company’s size in relation to the rest of the market. Cash flow tracks the movement of cash in and out of a company. To qualify for Nasdaq listing under the capitalization with cash flow standard, the following rules apply:

•  Aggregate cash flow of $27.5 million or more in the prior three fiscal years
•  Zero negative cash flow for the prior three fiscal years
•  Average market capitalization of $550 million or more over the prior 12 months
•  Revenue of $110 million or more for the previous fiscal year

Again, all four of those conditions have to be met to qualify for Nasdaq listing using this standard.

Standard 3: Capitalization with Revenue

The third Nasdaq listing standard focuses on company size and revenue, which is a measure of income. The minimum requirements for both are as follows:

• Average market capitalization of $850 million or more over the prior 12 months
• Revenue of $90 million or more for the previous fiscal year

Larger companies may opt to take this route if they can’t meet the cash flow requirements under Standard 2.

Standard 4: Assets with Equity

In lieu of earnings or market capitalization, companies can use their assets and the value of shareholders’ equity to qualify for listing on the Nasdaq. There are three specific thresholds companies have to meet:

•  Market capitalization of $160 million
•  Total assets of $80 million
•  Stockholders’ equity of $55 million

Regardless of which standard a company uses to qualify for listing, they have to maintain them continually. Otherwise, the company could be delisted from the Nasdaq exchange.

General Nasdaq Listing Rules

Aside from meeting the listing requirements set forth for each standard, there are some general Nasdaq listing requirements companies have to observe.

For example, the Nasdaq minimum share price or bid price for inclusion is $4. It’s possible to qualify with a bid price below that amount but that may entail meeting additional requirements.

Companies must also have at least 1.25 million publicly traded shares outstanding. That threshold applies to both seasoned companies and those seeking their initial public offering (IPO). Additionally, IPO requirements specify that the market value of those shares must be at least $45 million. For seasoned companies, the market value requirement increases to $110 million.

Nasdaq listing rules also cover criteria related to corporate governance. Under those requirements, companies must:

•  Make annual and interim reports available to shareholders
•  Have a majority of independent directors on the board of directors
•  Adopt a code of conduct that applies to all employees
•  Hold annual meetings of shareholders
•  Avoid potential or actual conflicts of interest

Companies must also pay a listing fee to gain entry to the Nasdaq. Entry fees can range from $150,000 to $295,000, depending on the total number of shares outstanding. Those amounts include a non-refundable $25,000 application fee. Paying the fee doesn’t guarantee that a company will be listed on the Nasdaq.

How to Choose NASDAQ Stocks

Knowing how stocks are chosen for the Nasdaq and other exchanges can be helpful in conducting your own research when deciding what to buy or sell. Listing on the Nasdaq or NYSE can also be important for a company in terms of which exchange-traded fund it gets added into. Broadly speaking, there are two ways to approach stock research: technical analysis and fundamental analysis.

Technical analysis focuses on market trends, momentum and day-to-day movements in stock pricing. You may use a technical analysis approach for choosing stocks if you’re an active day trader who’s interested in capitalizing on market trends to make short-term gains.

Using fundamental analysis on stocks, on the other hand, focuses on a company’s financial health. That includes things like earnings, profitability and how much debt the company has. Using a fundamental approach may be preferable if you favor a long-term, buy-and-hold strategy. And fundamental analysis echoes how the Nasdaq and other stock exchanges determine which stocks to include.

The Takeaway

Becoming a savvy investor starts with learning the basics of how the stock market and stock exchanges such as the Nasdaq work. Understanding Nasdaq listing requirements can offer insight into how stock exchanges select which companies to offer for trading.

When you’re ready to invest, you can use an online platform like SoFi Invest® to begin. It’s possible to start investing with as little as $1 and build a diversified portfolio that includes individual stocks and low-cost exchange-traded funds (ETFs) from the Nasdaq as well as other exchanges.

About the author

Rebecca Lake

SoFi Invest®

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

Mar

2025

Mutual Funds vs Stocks: Differences and How to Choose

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

Mutual funds provide a collection of many investments in a single basket, while stocks allow you to own shares in individual companies.

Either type of asset can help you reach your investing goals — and of course it’s possible to own mutual funds shares as well as stocks. But there are advantages and disadvantages to mutual funds vs. stocks.

Key Points

• Mutual funds offer a diversified portfolio in a single investment, whereas stocks are shares in individual companies.

• Mutual funds can be actively or passively managed, with some tracking market indexes.

• Stocks provide direct ownership in a company, offering potential for higher returns and greater risk.

• Mutual funds are managed by professionals, making them a good option for those who prefer not to manage their investments.

• The choice between mutual funds and stocks depends on individual financial goals, risk tolerance, and investment strategy.

What’s the Difference Between Mutual Funds and Stocks?

The biggest difference between a mutual fund and a stock lies in what you own: a mutual fund is a type of pooled investment fund, and a stock refers to shares of ownership in a single company.

Mutual funds can hold multiple investments in a single vehicle (e.g. stocks, bonds, or other assets). Sometimes a mutual fund can hold a mix of stocks, bonds, and short-term debt; these are called blended funds.

Different Types of Mutual Funds

Another difference between mutual funds vs. stocks: Mutual funds can be structured in a variety of ways. Often, a mutual fund manager is responsible for choosing the investments the fund holds, according to the fund’s objectives and investment strategy. But not all funds are actively managed funds; some are passively managed and track a market index (see bleow).

Some types of mutual funds include:

• Equity funds: These funds can hold the stocks of hundreds of companies. An equity fund typically has a specific focus, e.g. large-cap companies, tech companies, and so on.

• Bond funds: These provide access to various types of bonds. Similar to equity funds, bond funds can offer exposure to different sectors, e.g. green bonds, short-term bonds, corporate bonds, etc.

• Target-date funds: Often used in retirement plans, target-date funds use algorithms to adjust their holdings over time to become more conservative.

• Index funds: Index funds are designed to track or mirror a specific market index, e.g. the S&P 500, the Russell 2000, and so on. These are considered passive vehicles vs. mutual funds that are led by a team of portfolio managers.

• Exchange-traded funds (ETFs): ETFs are similar to mutual funds in that they hold a variety of different securities, but shares of these funds trade throughout the day on an exchange similar to stocks.

What Are Stocks?

Simply put, a stock represents an ownership share in a single company. There’s no fund manager here; you decide which stocks you want to buy or which ones you want to sell, often using a brokerage account. You might buy 10 shares of one company, 50 shares of a second, and 100 shares of a third — it’s up to you.

Just as there are different types of mutual funds, there are different types of stocks that reflect the underlying company. For example, your portfolio might include:

• Value stocks: Companies that are trading lower than their potential value, based on fundamentals.

• Growth stocks: Companies with a track record of steady growth.

• Dividend stocks: Companies that payout a portion of their earnings to shareholders in the form of dividends. Note that value stocks often pay dividends, but growth stocks tend to reinvest their profits (per their name) toward growth and expansion.

Here’s another way to think of the differences between mutual funds and stocks. If a mutual fund is a carton of eggs, a stock is one egg in that carton.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Pros and Cons of Mutual Funds

Investing in mutual funds can be a good option for beginners who are ready to wade into the market but aren’t savvy about individual stocks just yet. There are, however, some downsides to keep in mind.

Pros	Cons
Diversification is simplified	Some funds may underperform
Easy access to the markets	Higher minimum investments
May be cheaper than stocks	Not all funds are low-cost

Pros of Mutual Funds:

• Mutual funds make portfolio diversification easier. Diversifying your portfolio can help manage risk. When you buy a mutual fund, you get immediate diversification since the fund may hold a variety of securities or alternative investments.

• Someone else makes the decisions. Choosing the right investments for a portfolio can be complicated for many investors, but a mutual fund takes care of the selection process. In the case of an active fund, the fund manager is in charge of buying or selling investments within the fund. A passive fund tracks an index, as mentioned above. Either way, all you have to do is invest your money.

• Costs may be lower. When you invest in mutual funds, you’ll pay what’s called an expense ratio. This is a fee that represents the cost of owning the fund annually. While some funds are more expensive than others, there are plenty of low-cost options which means you get to keep more of your investment earnings.

Cons of Mutual Funds:

• Performance isn’t guaranteed. While some actively managed mutual funds attempt to beat the market, others are structured to match the performance of an index. The main thing to know, however, is that results are never guaranteed, and your fund investments may fall short of expectations.

• Minimum investments may be high. Some mutual funds have a low barrier to entry, and you can get started with a relatively small amount of money, especially if you invest via automatic deposits. Others, however, may require you to have a high minimum investment requirement (e.g. $5,000), which could be challenging if you’re a beginner. With stocks, on the other hand, it’s possible to buy fractional shares with as little as $1.

• Potentially higher costs. Mutual fund expense ratios can vary widely, and some can be much more expensive than others. In general, active funds charge higher fees. In addition, some brokerages charge load fees to buy or sell funds which can add to your overall costs. It’s important to understand what you’re paying for your investments, as fees can eat into returns over time.

Pros and Cons of Individual Stocks

Investing in stocks might appeal to you if you’d like more control over where your money goes. But just as with mutual funds, there are some potential drawbacks to consider.

Pros	Cons
High return potential	Higher risk
Greater flexibility	More difficult to diversify
Low costs	More time-consuming

Pros of Individual Stocks:

• Potentially earn higher returns. Owning individual stocks could lead to better results in your portfolio compared with mutual funds. It’s important to remember, however, that not all stocks offer the same rate of return, and performance of any stock (or any investment) is never guaranteed.

• You’re in control. Investing in stocks means you have total control of what to buy and sell, and when to make trades. You’re not relying on a fund manager to make decisions for you. That’s something you might appreciate if you prefer a DIY or active approach to investing.

• Trading costs may be low. When you buy and sell stocks, your brokerage can charge a commission fee each time. However, more brokerages are moving to a $0 commission-fee model for stock trades which can cut your investing costs down dramatically.

Cons of Individual Stocks:

• Stocks are volatile. Mutual funds are often viewed as being less risky than stocks since you’re diversified across a range of securities. If you’re putting a large chunk of your portfolio into a smaller pool of stocks or just one company, you could be at risk of a major loss if volatility hits that part of the market.

• Diversification is harder. When you invest in individual stocks, you may have to buy more of them to create a diversified portfolio. With a mutual fund, you don’t have to do that since you’re getting exposure to multiple investments in one fund.

• Stock trading can be time intensive. Taking a buy-and-hold approach to stocks means you don’t have to pay as much attention to your portfolio. You can buy stocks, and then hang onto them for the long term. However, if you’re more interested in active trading then you’ll need to spend more of your day keeping up with stock trends and monitoring the markets so you don’t miss any opportunities to make gains.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Choosing Between Mutual Funds and Stocks

There’s no rule that says you must choose between mutual funds vs. stocks. Deciding which one to invest in can depend on your time horizon for investing, risk tolerance, and goals. And you might decide that both make sense in your portfolio.

Here’s a simple breakdown of how to compare the two when deciding where to invest.

Consider mutual funds if you…	Consider stocks if you…
Want a simple way to build a portfolio under the guidance of an experienced fund manager who knows the market.	Prefer to have more control of which companies you invest in, and when you buy or sell those investments.
Are more comfortable with the idea of generating returns over time vs. chasing the highest rewards of the moment.	Want to leverage investments to produce the highest returns possible, even if it means taking a little more risk in your portfolio.
Don’t have the time or inclination to spend hours researching different investments or conducting in-depth market analyses.	Are comfortable researching stocks on your own, and understand how to apply different types of technical analysis to evaluate them.

The Takeaway

Investing is one way to build wealth, but both mutual funds and stocks can help investors realize their financial goals — but in different ways. Weighing the pros and cons of mutual funds vs. stocks as well as your personal preferences for investing can help you decide how to build a portfolio that meets your needs.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Which is riskier, stocks or mutual funds?

Both stocks and mutual funds expose investors to the risk of loss, though the degree of risk can vary by investment. Mutual funds may help to distribute risk thanks to a diverse mix of underlying investments, while individual stocks can concentrate risk. However, it’s important to remember that you can lose money with either.

Which investment is best for beginners, mutual funds or stocks?

Mutual funds can be a good place for beginning investors to get started since they offer basic diversification. The key to choosing a mutual fund as a beginner is to consider the underlying investments in light of your own asset allocation, the fund’s track record, and the fees you’ll pay.

Are mutual funds worth it?

Mutual funds can be a worthwhile investment because they provide a cost-effective way to access a range of sectors that may align with your goals. For example, if you want to invest in big companies in the U.S., you can buy shares of a large-cap fund. If you want to invest in the environment, you can invest in a green bond fund or green tech equity fund.

About the author

Rebecca Lake

Photo credit: iStock/Eva-Katalin

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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.

SOIN0124121

What Are Over-the-Counter (OTC) Stocks?

What Are OTC Stocks?

How to Buy OTC Stocks

Types of OTC Securities

Types of OTC Markets

OTCQX

OTCQB

Pink Sheets

Pros and Cons of OTC Trading

The Takeaway

FAQ

How do OTC stocks differ from stocks listed on major exchanges?

How can I buy or sell OTC stocks?

Are there any specific regulations or reporting requirements for OTC stocks?

What are the main factors to consider when researching OTC stocks?

Are there any restrictions or limitations on trading OTC stocks?

Net Present Value: How to Calculate NPV

What Is Net Present Value (NPV)?

How to Calculate NPV

NPV Formula

Example of NPV with a Single Cash Flow Investment

Example of NPV with Multiple Cash Flows

Tools to Help Calculate NPV

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What Does NPV Show You?

What Is a Good NPV?

Comparing NPV

NPV vs Present Value

NPV vs IRR

NPV vs ROI

NPV vs Payback Period

Benefits and Drawbacks of NPV

Benefits of NPV

Drawbacks of NPV

How Investors Can Use NPV

The Takeaway

FAQ

Is a higher NPV better?

What is the basic NPV investment rule?

Is NPV the same as profit?

Is a NPV of 0 acceptable?

When should NPV not be used?

Is Excel NPV accurate?

Guide to Morningstar Ratings

What are Morningstar Ratings?

How Morningstar Ratings Work

The “Star Rating” Explained

The “Analyst Rating” Explained

How Morningstar Measures Volatility

Example of a Morningstar Rating

Are Morningstar Ratings Accurate?

Use Expense Ratios

How Should Investors Use Morningstar Ratings?

Risks of Morningstar Ratings

Morningstar Ratings for Funds

Other Investment Risk Rating Providers

Trading Stocks With SoFi

FAQ

How reliable are Morningstar ratings?

Is a Morningstar rating of “5” good?

NASDAQ Listing Requirements Explained

What is the Nasdaq?

Nasdaq Listing Requirements

Standard 1: Earnings

Standard 2: Capitalization with Cash Flow

Standard 3: Capitalization with Revenue

Standard 4: Assets with Equity

General Nasdaq Listing Rules

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How to Choose NASDAQ Stocks

The Takeaway

Mutual Funds vs Stocks: Differences and How to Choose

What’s the Difference Between Mutual Funds and Stocks?

Different Types of Mutual Funds

What Are Stocks?

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

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Pros and Cons of Mutual Funds

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