Jul
27
2023
Preferred Stock vs. Common Stock
Before you start trading on the market, read our guide to understand the pros and cons of common vs. preferred stock.
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SoFi
Student Loan Consolidation and Refinancing
Jul
27
2023
What Types of Stocks Do Well During Volatility?
Volatility is a measure of how much and how often a security’s price or a market index moves up or down over time. Higher volatility can mean higher risk, but it also has the potential to generate bigger rewards for investors. Meanwhile, lower volatility is typically correlated with lower risk and lower returns.
Developing a volatility investing strategy can make it easier to maximize returns while managing risk as the market moves from bullish to bearish and back again. Understanding the various stock market sectors and how they react to volatility is a good place to start. This can help with building a portfolio that’s designed to withstand occasional market dips or in the worst-case scenario, a recession.
What Causes Volatility in the Stock Market?
To implement a volatility investing plan it helps to first understand what causes fluctuations in stock prices to begin with. Stock market volatility can ebb and flow over time, and how high or low it is can depend on a number of factors. Some of the things that can push volatility levels higher include:
• Political events, such as elections
• Release of quarterly earnings reports
• Natural disasters
• The bursting of a stock market bubble
• Crises that in foreign countries
• Federal Reserve adjustments to interest rate policy
• News of a merger or acquisition
• Changes to fiscal policy
• Initial Public Offerings (IPOs) hitting the market
• Excitement over meme stocks
A global pandemic can also spark volatility, as evidenced in the mini market crash that occurred early in 2020. Coronavirus fears prompted the end of the longest bull market in history, sending stocks into a bear market.
The downturn was significant enough that the National Bureau of Economic Research Business Cycle Dating Committee dubbed it a recession. It was, however, the shortest on record, lasting just two months. (By comparison, it took 18 months for the stock market to go from peak to trough during the Great Recession).
Predicting volatility can be difficult, though there is a tool that attempts it. The Cboe Volatility Index (VIX) is a market index designed to measure expected volatility in the stock market. The VIX uses real-time stock quotes to calculate projected volatility over the coming 30 days. The VIX is one factor that goes into the Fear and Greed Index, which measures the emotions driving the stock market.
💡 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.
Market Sectors and Volatility
The stock market is effectively a pie with 11 different slices called sectors. These sectors represent the various segments of the market, based on the industries and companies they represent. The 11 sectors identified by the Global Industry Classification Standard (GICS) are:
• Information technology
• Health care
• Financials
• Consumer discretionary
• Consumer staples
• Communication services
• Industrials
• Materials
• Energy
• Utilities
• Real estate
Some of these sectors include more volatile industries than others, and the share of stocks in those industries within a given portfolio can impact how the portfolio reacts during times of volatility.
Stocks that tend to bear up under the pressure of a downturn or recession are generally categorized as defensive. You may also hear the terms “cyclical” and “non cyclical” used in reference to different market sectors. A cyclical sector or stock is one that’s volatile and tends to follow economic trends at any given time. Non Cyclical sectors or stocks, on the other hand, may outperform when the market experiences a downturn.
What Stock Sectors Do Best During Market Volatility?
Defensive stock market sectors tend to do better when the market is in decline for one reason: they represent things that consumers still need to spend money on, even when the economy is weakening. That means they may be of interest if you’re investing during a recession.
The following sectors tend to do the best during times of volatility:
• Utilities
• Consumer staples
• Health care
Here’s a closer look at how each sector works.
Utilities
The utilities sector represents companies and industries that provide utility services. That includes gas, electric, and water utilities. It can also include power producers, energy traders, and companies related to renewable energy production or distribution.
Since people still need running water, electricity and heat during a recession, utilities stocks tend to be a safe defensive bet.
Consumer Staples
The consumer staples sector covers companies and industries that are less sensitive to a changing economic or business cycle. That includes things like food and beverage manufacturers and distributors, food and drug retailing companies, tobacco producers, companies that produce household or personal care items and consumer super centers.
In simpler terms, the consumer staples sector means things like grocery stores, drugstores, and the manufacturers of everyday products. Since people still need to buy food and basic household or personal care items in a recession, stocks from these sectors can do well when volatility is high.
Health care
The health care sector includes health care service providers, companies that manufacture health care equipment, distributors of that equipment, health care technology companies, research and development companies and pharmaceutical companies.
Health care is a defensive sector since a recession usually doesn’t disrupt the need for medical care or medications.
💡 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.
What Sectors and Stocks Are More Volatile?
When a recession sets in, defensive sector stocks can be a good buy. The period before a recession begins is often marked by increased volatility and declining stock prices. The impacts of that volatility may be more deeply felt in these sectors:
• Consumer discretionary
• Financials
• Communication services
• Energy
• Information technology
• Commodities
• Industrials
• Materials
These sectors represent more volatile industries that are more likely to be affected by large-scale market trends. For example, the financial sector suffered a serious blow leading up to the Great Recession. A decline in home prices paired with faulty lending practices prompted widespread defaults on mortgage-backed securities, leading a number of financial institutions to seek government bailout funding.
On the other hand, some of these same sectors do well when the economy is coming out of a recession and entering the early stage of the business cycle. For example, the consumer discretionary sector, which includes things like travel and entertainment, typically rebounds as consumers ease their purse strings and start spending on “fun” again. The industrials and materials sectors may also pick up if there’s an increase in manufacturing and production activity.
Understanding the relationships between individual sectors and the business cycle can make it easier to implement a sector investing approach. With sector investing, you’re adjusting your asset allocation over time to try and stay ahead of the economic cycle.
If you suspect a recession might be coming, for example, a sector investing strategy would dictate shifting some of your assets to defensive stocks. On the other hand, if you believe a recession is about to end and stocks are set to bounce back, you may shift your allocation to include more volatile industries that tend to do better in the early stages of the business cycle.
Recommended: Why You Need to Invest When the Market Is Down
Volatility and Business Cycles
Identifying volatile industries generally means considering which sectors or stocks are most sensitive to changes in the economic cycle. Aside from recessionary periods, the business cycle has three other stages:
Early Stage
The early stage of the business cycle typically represents the initial recovery period following a recession. Consumers may begin spending more money on non essentials as the economy begins to strengthen. This is also called the expansion phase, and it may coincide with periods of inflation.
Mid Stage
During the mid stage, the economy begins to hit a peak or plateau with growth leveling off. People are still spending money but the pace may begin slowing down.
Late Stage
The late stage is also called the contraction stage, as economic growth lags. The late stage of the business cycle is usually a precursor to the trough or recession stage.
The Takeaway
Volatility is unavoidable but there are things investors can do to minimize the impact to their portfolio. Diversifying with stocks, exchange-traded funds (ETFs), or IPOs could help create volatility hedges.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Photo credit: iStock/Serdarbayraktar
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.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN0723032
Read moreJul
27
2023
How to Invest in Gold: Tips for 1st Time Gold Investors
As you build your investing portfolio, you might wonder: Is gold a good investment? While some investors may be interested in it as a hedge against inflation or market downturns, or to further diversify their portfolio, it’s important to know that investing in gold isn’t simple, especially for first-time investors. One reason is that there are so many ways to invest in gold, each with their own pros and cons.
Why Investors Like Gold
Historically, investors have turned to gold as a way to hedge against the possibility of inflation or events that could negatively impact the equity markets. And while it can be just as volatile as stocks in the short term, gold has historically held its value well over the long term. Even investors who are not particularly concerned about inflation or about calamities affecting the broader market, may turn to gold as a way to diversify a portfolio.
5 Ways to Invest in Gold
For anyone considering investing in this precious metal, it can be helpful to familiarize yourself with the different ways one can invest in gold.
Buy Physical Gold
When thinking of ways to invest in gold, the first image that may come to mind is piles of gold bars in a place like Fort Knox. Those bars are also known as bullion, and it comes in bars that can be as small as a few grams, or as large as 400 ounces. The most common denominations of gold bullion are one- and 10-ounce bars.
For many investors, even the one-ounce bars can be too expensive — roughly $2,200 per ounce in mid 2023. And because the bullion is a physical item, there’s no easy way to own a fraction of a bar. But if you do want to own bullion directly, the first order of business is to find a reputable dealer to buy from, and then look into the costs of delivery and insurance for the asset. Another option if you buy bullion is to pay for storage, either in a large vault or in a safety deposit box at a bank.
Buy Gold Coins
Gold coins offer another way to directly own the shiny yellow metal, in a variety of denominations including half-ounce and quarter-ounce. Well-known gold coins include South African Krugerrands, Canadian Maple Leafs, and American Gold Eagles, which have been known to sell at a premium to their actual gold content among collectors.
While you may be able to buy gold coins at a discount from local collectors or pawn shops, most investors will likely opt for a reputable dealer. As with bullion, it is important to protect this hard asset, either through insurance, or with a vault or safe deposit box.
Buy Gold Jewelry
If you don’t want your gold investment to just sit in a vault, then gold jewelry may be appealing. But it comes with its own considerations. The first is that gold jewelry may not have as much actual gold content as the jeweler claims. Verifying the authenticity of a piece not only protects you, but it will also help when it comes time to sell the piece. One way to do this is to only buy jewelry from reputable dealers, who can also deliver documentation about the piece.
Another point to remember is that a piece of jewelry will also come with a markup from the company that made it, which can make the piece cost as much as three times the value of its metal. And jewelry typically isn’t 100% pure gold — or 24 karats — so it’s important to know the purity and melt value of the jewelry before you buy.
Buy the Stocks of Gold Mining Companies
One way to take advantage of growth in the value of gold with your existing brokerage account that you might want to consider is to buy the stocks of companies in the gold business, including miners and refiners.
While gold stocks tend to go up and down with the price of gold, they may also experience price changes based on the company’s own prospects.
💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Buy Gold ETFs and Mutual Funds
If the risks or individual mining and refining companies are too much, you may want to consider a gold exchange-traded fund (ETF) or mutual fund. These vehicles — which are available through one’s brokerage account — invest in gold in different ways.
Buy Gold Futures and Options
Experienced investors with some familiarity trading derivatives may consider investing in the gold market through futures and options. These contracts allow the investor to buy or sell gold for an agreed-upon price by a fixed date. To trade these contracts, an investor needs a brokerage account that offers the ability to trade them.
An investment in gold options or futures contracts, however, requires active monitoring. These contracts expire on a regular basis, so investors have to be ready to sell, roll over, or exercise them as gold prices change, and as the contracts reach their expiration dates.
💡 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.
What Will Gold Be Worth in 2030?
Predicting the future price of an idiosyncratic and volatile commodity like gold is all but impossible. For instance, back in 2020, gold increased in value by 24.6% in U.S. dollars, and reached all-time highs in a number of currencies, in anticipation of a coming wave of inflation.
In its 2023 In Gold We Trust report, asset manager Incrementum predicted a “showdown in gold prices” and increased demand due to inflation and a possible recession, stating that “investment demand from gold ETFs could tip the gold prices scales.”
One reason why gold investors believe the precious metal may have strong prospects is that the broader economy has been in an inflationary period. One measure of this is the consumer price index (CPI). The latest CPI data in mid-2023 showed that inflation is slowing, but it’s still a concern for consumers and for investors.
The Takeaway
Investors interested in gold typically gravitate toward it as a hedge against inflation or as a means of diversifying their portfolios. Those who want access to this precious metal have some choices: They can buy bullion, coins, jewelry, mining stocks, ETFs, mutual funds, futures, and options.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Image credit: iStock/LeonidKos
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.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOIN0723025
Read moreJul
26
2023
Stakeholder vs Shareholder: What’s the Difference?
Shareholders and stakeholders both have an interest in a company’s operations, but their priorities may differ.
Read moreJul
26
2023
How to Make Principal-Only Payments on Student Loans
Making principal-only payments on student loans (either monthly or just occasionally) can help speed up the payback time and lower your overall borrowing costs. But just making extra payments on your loan won’t necessarily lower your loan’s principal balance. You typically need to take a few extra steps to ensure that your extra payments actually go toward principal — and not interest on the loan.
Reed on to learn exactly what a principal-only student loan payment is and how to be sure you’re doing it right.
What Is a Principal-Only Student Loan Payment?
To understand what principal-only payments are, it helps to understand how student loan repayment works.
When you take out a student loan, you need to repay the principal balance. (the amount you borrowed), interest (the cost of borrowing the principal) and, in some cases, fees (which are often paid up front).
When it’s time to start repaying your student loan, you are usually required to make at least a minimum payment each month. That payment will go towards both your principal balance and interest. In the beginning, most of your payment will go toward interest and very little towards principal. Over time, however, the balance shifts — more of your monthly payment will go toward principal and less will go towards interest.
Fortunately, student loans have no prepayment penalties. This means that If you make an extra, principal-only payment, it will lower the principal balance of your loan, and the lender will not be able to charge you a fee for paying some of your loan off early.
Unfortunately, when a lender receives a payment beyond the minimum due each month, they may simply apply it to next month’s bill rather than use that money to lower your principal. This means there are certain steps you need to take to make sure the money will only go towards principal (more on that below).
💡 Quick Tip: Pay down your student loans faster with SoFi reward points you earn along the way.
Why Making Principal-Only Payments Can Make a Difference
Since interest on a student loan is calculated daily on the principal balance at that time, the less principal you have left to pay, the lower your interest costs. As a result, paying extra on your student loan — and having that money go directly to the principal — can save you a significant amount of money. It also helps you pay off your student loans faster.
Of course, not everyone is in a position to pay more than the required amount in any given month, and that’s fine, too. You might simply choose to use an occasional windfall — such as a bonus at work or a cash gift — to make a principal-only payment on your student loans.
Recommended: 9 Smart Ways to Pay Off Student Loans
How to Make Principal-Only Payments on Student Loans
Just making an extra payment on your student loan doesn’t necessarily mean you are making a principal-only payment.
Generally, student loan servicers apply your payments first to cover any late fees you’ve incurred and then to accrued interest before they apply anything to your principal. Here are some tips that can help ensure any extra payments you make go toward your principal.
Tell Your lender Where to Direct Extra Payments
If you pay online through the servicer’s website, you might have the option to choose how the money gets applied. There may be an option that says “other amount” where you can enter an extra amount you want to pay towards your loan that month, as well as where that money should be applied, such as to the interest only, the interest and principal, or just the principal.
In some cases, you might see an option for “Do not advance the due date.” Clicking this will ensure that your lender treats your funds as an extra payment rather than applying them toward next month’s bill.
If you want to make a larger payment every month and have the extra applied to principal, you may also have the option of setting up standing instructions online, telling your servicer to send any extra money towards the principal.
If you pay by check or don’t see these options online, you’ll need to contact your loan servicer and ask how to make occasional or regular principal-only payments. You may need to send a standing order in writing.
Apply Extra Payments Strategically
If you have more than one student loan, you can typically request that your student loan servicer apply your extra payments to a specific loan (such as the loan with the highest interest rate) in order to ensure you can save money and meet your debt repayment goals.
There are two common approaches to paying down debt on multiple loans:
• The snowball method This involves paying off the smallest loan first, then moving on to the next-biggest loan. This approach can give you a sense of making progress, and motivate you to keep going.
• The avalanche method This tackles the loan with the highest interest rate first. Putting extra payments on the most expensive loan will save you the most money. However, it won’t allow you to cross a loan off your list as quickly.
Recommended: 6 Strategies to Pay off Student Loans Quickly
Keep a Close Eye on Your Statements
To make sure your principal-only payment was just that — it went to principal only — it’s a good idea to check your online account or loan statements each month to make sure any extra payments you made were correctly applied. You’ll also want to make sure the money was applied to the loan you specified.
If your lender didn’t apply your extra payment to the principal balance, you’ll want to reach out to ensure that future payments are accurately applied.
💡 Quick Tip: Federal student loans carry an origination or processing fee (1.057% for Direct Subsidized and Unsubsidized loans first disbursed from Oct. 1, 2020, through Oct. 1, 2024). The fee is subtracted from your loan amount, which is why the amount disbursed is less than the amount you borrowed. That said, some private student loan lenders don’t charge an origination fee.
Consider Refinancing Student Loans for Better Rates
Making principal only payments isn’t the only way to lower your interest costs and/or pay off your loan early. You might also be able to do this by refinancing your student loans with a private lender, such a bank, credit union, or online lender.
With a student loan refinance, you exchange one or more of your old loans for a new one, ideally with a lower rate or better terms. This process can be helpful if you have a solid credit score (or have a cosigner who does), since it might qualify you for a lower interest rate. In addition, you could choose a shorter repayment term to get out of debt faster.
You can refinance both federal and private student loans. Keep in mind, however, that refinancing federal student loans can result in a loss of certain borrower protections, such as income-driven repayment and student loan forgiveness. Because of this, you’ll want to consider the potential downsides of refinancing before making changes to your debt.
The Takeaway
The thought of finding extra money — beyond your required monthly payment — to pay down student debt may be daunting. But the benefits could make it worth the effort and sacrifice. Making principal-only payments will help reduce the interest you pay over the life of your student loan. And, the more often you pay down your principal balance, the faster you’ll pay off your student loans.
If you choose to make principal-only payments, you’ll want to communicate with your lender to make sure that those additional payments are applied only to your loan’s outstanding principal.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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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