IC3 Archives

Jun

2023

Are Fractional Shares Worth Buying?

By Matthew Warholak | Growing Wealth, invest, Investing | Comments Off

Fractional shares are a useful way to allow new investors to get their feet wet by investing small amounts of money into parts of a share of stock. For some investors, fractional shares are worth it because it means they can own a part of a stock from a company they are interested in, without committing to buying a whole share.

While fractional shares have much in common with whole shares, they don’t trade on the open market as a standalone product. Because of that, fractional shares must be sold through a major brokerage.

Recommended: How to Open a Brokerage Account

What Does It Mean to Buy Fractional Shares?

A fractional share is less than one whole equity share (e.g. 0.34 shares). Fractional shares appreciate or depreciate at the same rate as whole shares, and distribute dividends at the same yield proportionate to the fractional amount.

Fractional shares were previously only available to institutional investors at one-sixteenth intervals, but have recently become widely available to retail investors at exact decimals (in order to increase market pricing precision and lower trading costs).

This new capability offers another layer of financial inclusion to casual investors by lowering minimum investing requirements to thousands of stocks and assets and making them available in smaller quantities. According to Gallup, 45% of all Americans have no stock investments—but fractional shares provide an increasingly lower barrier to investing than in previous generations.

Why Fractional Shares Are Worth Buying

For some investors, these positives make buying fractional shares worth it.

Access to Unaffordable Stocks

Fractional shares can help build a portfolio made of select stocks, some of which may be too expensive for some investors to afford one whole share. With fractional shares, an investor can choose stocks based on more than just price per share.

Previously, new investors would face price discrimination for not having enough funds to buy one whole share. But with fractional shares, an investor with $1,000 to spend who wants to buy a stock that costs $2,000 per share, can buy 0.5 shares of that stock.

Fractional shares make it easier to spread a modest investment amount across a variety of stocks. Over time, it may be possible to buy more of each stock to total one or more whole shares. In the meantime, buying a fractional share allows an investor to immediately benefit from a stock’s gain, begin the countdown to qualify for long-term capital gains (if applicable), and receive dividends.

A Doorway to Investing

History has shown that the stock market typically outperforms fixed-income assets and interest-bearing savings accounts by a wide margin. If equities continue to provide returns comparable to the long-term average of 7%, even a small investment can outperform money market savings accounts, which typically yield 1-2%. (Though as always, it’s important to remember that past performance does not guarantee future success.)

By utilizing fractional shares, beginners can make small investments in the stock market with significantly more growth potential even with average market returns versus savings accounts that typically don’t even match inflation.

Maximized Dollar-Cost Averaging

Fractional shares help maximize dollar-cost averaging, in which investors invest a fixed amount of money at regular intervals.

Because stock shares trade at precise amounts down to the second decimal, it’s rare for flat investment amounts to buy perfectly-even amounts of shares. With fractional shares, the full investment amount can be invested down to the last cent.

For example, if an investor contributes $500 monthly to a mutual fund with shares each worth $30, they would receive 16.66 shares. This process then repeats next month and the same investment amount is used to purchase the maximum number of shares, with both new and old fractional shares pooled together to form a whole share whenever possible.

Maximized Dividend Reinvestment Plans

This same scenario applies to dividend reinvestment plans (also known as DRIP investing). In smaller dividend investment accounts, initial dividends received may be too small to afford one whole share. With fractional shares, the marginal dividend amount can be reinvested no matter how small the amount.

Fractional shares can be an important component in a dividend reinvestment strategy because of the power of compounding interest. If an investor automatically invests $500 per month at $30 per share but can’t buy fractional shares, only $480 of $500 can be invested that month, forfeiting the opportunity to buy 0.66 shares. While this doesn’t seem like much, not investing that extra $20 every month can diminish both investment gains and dividends over time.

Stock Splits

Stock splits occur when a company reduces its stock price by proportionately issuing more shares to shareholders at a reduced price. This process doesn’t affect the total value of an investment in the stock, but rather how the value is calculated.

For some investors, a stock split may cause a split of existing shares resulting in fractional shares. For example, if an investor owns 11 shares of a company stock worth $30 and that company undergoes a two-for-three stock split, the 15 shares would increase to 22.5 but each share’s price would decrease from $30 to $20. In this scenario, the stock split results in the same total of $450 but generated a fractional share.

Mergers or Acquisitions

If two (or more) companies merge, they often combine stocks using a predetermined ratio that may produce fractional shares. This ratio can be imprecise and generate fractional shares depending on how many shares a shareholder owns. Alternatively, shareholders are sometimes given the option of receiving cash in lieu of fractional shares following an impending stock split, merger, or acquisition.

Too expensive? Not your favorite stocks.

Own part of a stock with fractional share investing.

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Disadvantages of Buying Fractional Shares

Fractional shares can be a useful asset if permitted, but depending on where you buy them could have major implications on their value.

Order Type Limitations

Full stock shares are typically enabled for a variety of order types to accommodate different types of trading requests. However, depending on the brokerage, fractional shares can be limited to basic order types such as market buys and sells. This prevents an investor from setting limit orders to trigger at certain price conditions and from executing trades outside of regular market hours.

Transferability

Not all brokerages allow fractional shares to be transferred in or out, making it difficult to consolidate investment accounts without losing the principal investment or market gains from fractional shares. This can also force an investor to hold a position they no longer desire, or sell at an undesirable price to consolidate funds.

Liquidity

If the selling stock doesn’t have much demand in the market, selling fractional shares might take longer than hoped or come at a less advantageous price due to a wider spread. It may also be possible to come across a stock with full shares that are liquid but fractional shares that are not, providing difficulty in executing trades let alone at close to market price.

Commissions

Brokerages that charge trading commissions may charge a flat fee per trade, regardless of share price or quantity of shares traded. This can be disadvantageous for someone who can only afford to buy fractional shares, as they’re being charged the same fee as someone who can buy whole or even multiple shares. Over time, these trading fees can add up and siphon limited capital that could otherwise be used to buy additional fractional shares.

Higher transaction fees

Worse yet, some brokerages may even charge higher transaction fees for processing fractional shares, further increasing investor overhead despite investing smaller amounts.

What Happens to Fractional Shares When You Sell?

As with most brokerages that allow fractional shares, fractional shares can either be sold individually or with other shares of the same asset. Capital gains or losses are then calculated based on the buy and sell prices proportionate to the fractional share.

The Takeaway

Fractional shares are an innovative market concept recently made available to investors. They allow investors of all experience and income levels access to the broader stock market—making it worth buying fractional shares for many investors.

Fractional shares have many other benefits as well—including the potential to maximize both DRIP and dollar-cost averaging. Still, as always, it makes sense to pay attention to downsides as well, such as fees disproportionate to the investment, and order limitations.

For investors who are curious about fractional shares, SoFi Invest® online brokerage makes it easy to start investing in partial stocks with as little as $5.

Find out how to invest in fractional shares with SoFi Invest.

SoFi Invest®

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

Apr

2023

Are Robo-Advisors Safe and Worth It?

By AJ Smith | Growing Wealth, invest, Investing | Comments Off

Automated portfolios have become a common option offered by financial companies, providing many people with a cost-efficient way to invest for retirement and other goals — while helping to manage certain market and behavioral risks via automated features.

Because robo-advisors typically rely on sophisticated computer algorithms to help investors set up and manage a diversified portfolio, some have questioned whether technology alone can address the range of needs that investors may have — beyond basic portfolio management.

Others note that the lower fees and lower minimum balance requirements typical of most robo-advisors, in addition to certain automated features, may provide a much-needed option for new investors.

Is a Robo-Advisor Right for You?

Robo-advisors typically use artificial intelligence to generate retirement and financial planning solutions that are tailored to people’s individual needs. Here are some questions to ask yourself, when deciding whether a robo-advisor is right for you.

How Does a Robo-Advisor Pick Investments?

While the term robo-advisor can mean different things depending on the company that offers the service, investors usually fill out an online questionnaire about their financial goals, risk tolerance, and investment time frames. On the back end, a computer algorithm then suggests a portfolio of different securities based on those parameters.

For example one person may be investing for retirement, another saving for the purchase of a home. Depending on each person’s preferences, the robo-advisor generates an asset allocation that aligns with the person’s goals in the form of a pre-set portfolio.

A portfolio for someone nearing retirement age would typically have a different allocation versus a portfolio for someone in their 20s, for example. Depending on these details, the service might automatically rebalance the portfolio over time, execute trades, and may even conduct tax-loss harvesting. SoFi’s automated portfolio does offer automatic rebalancing, but not automatic tax-loss harvesting.

Can I Choose My Own Investments?

A robo advisor typically has a range of investments they offer investors. Usually these are low-cost index exchange-traded funds (ETFs), but the offerings can vary from company to company. In most cases, though, your investment options are confined to those available through the robo-advisor, and typically you’re offered a selection of pre-set portfolios with limited or no ability to change the securities in that portfolio.

As the industry grows and becomes increasingly sophisticated, more companies are finding ways to offer investors new options like themed ETFs, stocks from different market sectors, socially responsible or ESG investing options, and more.

Who Manages the Portfolio?

Part of the appeal for some investors is that these portfolios are automated and thus require less hands-on involvement. This may be useful for people who are new to the process of setting up and managing a diversified portfolio, or who don’t feel comfortable doing so on their own.

In some cases, a robo-advisor service may also offer a consultation with a live human advisor. But again, in most cases the investor has limited control over the automated portfolio.

💡 Recommended: Robo Advisors vs. Financial Advisors

Are There Risks Involved in Using a Robo-Advisor?

Investment always involves some exposure to market risks. But robo-advisors may help manage behavioral risk. Many studies have shown that investors can be impulsive or emotional when making investment choices — often with less than optimal results.

By reducing the potential for human error through the use of automation, a robo-advisor may help limit potential losses.

What Do Robo-Advisors Cost?

While there are some robo-advisor services that have higher minimum balance requirements or investment fees, the majority of these services are cost efficient.

In some cases there are very low or no minimums required to set up a portfolio. And the management fees are typically lower than what you’d pay for a human advisor (although there are typically brokerage fees and expense ratios associated with the investments in the portfolio).

Pros and Cons of Robo Advisors

Hopefully, the questions above have clarified the way a robo-advisor works and shed some light on whether a robo service would be right for you. In addition, there are some pros and cons to keep in mind.

Pros of Robo Advisors

Saving for Retirement

It’s true that you can use a robo-advisor for almost any short- or long-term goal — you could use a robo advisor to save for an emergency or another savings goal, for example. But in many ways these services are well-suited to a long-term goal like retirement. Indeed, most robo services offer traditional retirement accounts like regular IRAs, Roth IRAs, SEP IRAs.

The reason a robo-advisor service can be useful for retirement is that the costs might be lower than some other investment options, which can help you keep more of your returns over time. And the automated features, like portfolio rebalancing and tax optimization (if available), can offer additional benefits over the years.

Typically, many robo portfolios require you to set up automated deposits. This can also help your portfolio grow over time — and the effect of dollar-cost averaging may offer long-term benefits as well.

Diversification

Achieving a well-diversified portfolio can be challenging for some people, research has shown, particularly those who are new to investing. Robo-advisors take the mystery and hassle out of the picture because the algorithm is designed to create a diversified portfolio of assets from the outset; you don’t have to do anything.

In addition, the automatic rebalancing feature helps to maintain that diversification over time — which can be an important tool to help minimize risks. (That said, diversification itself is no guarantee that you can avoid potential risks completely.)

Automatic Rebalancing

Similarly, many investors (even those who are experienced) may find the task of rebalancing their portfolio somewhat challenging — or tedious. The automatic rebalancing feature of most robo-advisors takes that chore off your plate as well, so that your portfolio adheres to your desired allocation until you choose to change it.

Tax Optimization

Some robo-advisors offer tax-loss harvesting, where investment losses are applied to gains in order to minimize taxes. This is another investment task that can be difficult for even experienced investors, so having it taken care of automatically can be highly useful — especially when considering the potential cost of taxes over time.

That said, automatic tax-loss harvesting has its pros and cons as well, and it’s unclear whether the long-term benefits help make a portfolio more tax efficient.

Want to start investing?

Our robo-advisor service can offer a portfolio to suit
your needs and risk level – with no SoFi advisory fees!

Cons of Robo-Advisors

Limited Investment Options

Most automated portfolios are similar to a prix fixe menu at a restaurant: With option A, you can get X, Y, Z investment choices. With option B, you can get a different selection, and so on. Typically, the securities available are low-cost index ETFs. It’s difficult to customize a robo account; even when there are other investments available through the financial company that offers the robo service, you wouldn’t have access to those.

In some cases, investors with higher balances may have access to a greater range of securities and are able to make their portfolios more personalized.

Little or No Personal Advice

The term “robo-advisor” can be misleading, as many have noted: These services don’t involve advice-giving robots. And while some services may allow you to speak to a live professional, they aren’t there to help you make a detailed financial plan, or to answer complex personal questions or dilemmas.

Again, for investors with higher balances, more options may be available. But for the most part robo-advisors only cover the basics of portfolio management. It’s up to each individual to monitor their personal situation and make financial decisions accordingly.

Performance

Robo-advisors have become commonplace, and they are considered reliable methods of investing, but that doesn’t mean they guarantee higher returns — or any returns. We discuss robo advisor performance in the section below.

Robo-Advisor Industry

Robo-advisors have grown quickly since the first companies launched in 2008-09, during and after the financial crisis. Prior to that, financial advisors and investment firms made use of similar technology to generate investment options for private clients, but independent robo advisor platforms made these automated portfolios widely available to retail investors.

The idea was to democratize the wealth-management industry by creating a cost-efficient investing alternative to the accounts and products offered by traditional firms.

Assets under management in the U.S. robo-advisor market are projected to reach about $2.76 trillion in 2023, according to Statista (estimates vary). There are dozens of robo-advisors available — from independent companies like SoFi Invest®, Betterment, and Ally, as well as established brokerages like Charles Schwab, Vanguard, T. Rowe Price, and more.

While this market is small compared to the $100 trillion in the global asset-management industry, robo-advisors are seen as potential game-changers that could revolutionize the world of financial advice.

Because they are direct-to-consumer and digital only, robo-advisors are available around the clock, making them more accessible. Their online presence has meant that the clientele of robo-advisors has tended to skew younger.

Also, traditional asset management firms often have large minimum balance requirements. At the high end, private wealth managers could require minimums of $5 million or more.

The cost of having a human financial advisor can also drive up fees north of 1% annually, versus the 0.25% of assets that robo-advisors typically charge (depending on assets on deposit). Note that this 0.25% is an annual management fee, and does not include the expense ratios of the underlying securities, which can add on another 5 or even 50 basis points, depending on the company and the portfolio.

How Have Robo-Advisors Performed in the Past?

Like any other type of investment — whether a mutual fund, ETF, stock, or bond — the performance of robo-advisors varies over time, and past performance is no guarantee of future returns.

Research from BackEnd Benchmarking, which publishes the Robo Report, a quarterly report on the robo-advisor industry, analyzed the performance of 30 U.S.-based robo-advisors. As of Dec. 31, 2022, the 5-year total portfolio returns, annualized and based on a 60-40 allocation, ranged from 2.84% to 5.12%. (Data not available for all 30 firms.)

💡 Recommended: How to Track Robo-Advisor Returns

The Takeaway

Despite being relative newcomers in finance, robo-advisors have become an established part of the asset management industry. These automated investment portfolios offer a reliable, cost-efficient investment option for investors who may not have access to accounts with traditional firms. They offer automated features that newer or less experienced investors may not have the skills to address.

Robo advisors don’t take the place of human financial advisors, but they can automate certain tasks that are challenging for ordinary or newbie investors: selecting a diversified group of investments that align with an individual’s goals; automatically rebalancing the portfolio over time; using tax-optimization strategies that may help reduce portfolio costs.

Curious to explore whether a robo-advisor is right for you? When you open an account with SoFi Invest®, it’s easy to use the automated investing feature. Even better, SoFi members have complimentary access to financial professionals who can answer any questions you might have.

Open an automated investing account and start investing for your future with as little as $1.

Advisory services provided by SoFi Wealth LLC, an SEC-registered investment advisor.
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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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 [email protected]. 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.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

SOIN0423003

Nov

2022

Should You Invest With Friends?

By Anna Davies | Growing Wealth, invest, Investing | Comments Off

Investing with friends can seem like an intriguing concept. Instead of being the sole decision maker, you can share financial and knowledge-based resources to come up with a compelling investment strategy that serves your collective goals.

Investing with friends may also be a way to make a substantial impact in a cause you believe in, such as raising funds to invest in a friend’s startup or business venture.

And investing is something you’re likely already using as a way to connect. According to SoFi’s research, 70% of SoFi Invest members talk about investing with friends, family, or colleagues at least once a week. So it might make sense to some people to pool that passion and capital and begin investing together.

Of course, investing with friends also comes with some particular concerns you’ll want to consider in advance:

• Who controls the investment account and how are investment decisions made?

• What is the process if one person wants to remove their portion of the investment?

• How will any returns be distributed?

• Does the investment have a set length of time, or will it continue in perpetuity, or until all parties have decided to withdraw or buy out their investment?

Talking through scenarios like this can be helpful. It can also be helpful to come up with some sort of contract that outlines contingencies, so you know everyone is on the same page.

Pros and Cons of Investing With Friends

There are a number of upsides to investing with friends, but also some reasons to be cautious.

Pros	Cons
Friends can enjoy trust and similar POVs	Friends may rely on an honor system rather than proper procedures
May be able to reach compromises more easily	Strong emotions can lead people to make impulsive money choices
Friends add enthusiasm and support

Pros

When you invest with your friends, you enjoy a certain amount of trust and, often, similar values and perspectives on life. This can make it easier to explore new opportunities and set goals together.

Friends may have the ability to overcome disagreements and reach necessary compromises — a big plus when it comes to managing money.

Last, friends can cheer each other on, and pool enthusiasm as well as funds to generate momentum, and sustain commitment.

Cons

On the flip side, being friends sometimes leads people to rely on a “handshake” or honor system for doing business, rather than setting up proper protocols, paperwork, and protections.

This is understandable — you want to believe your friends have your back in all cases — but financial endeavors often function better with firewalls in place. That’s because, as much as you may like your friends, they’re only human. They may drop the ball, forget important details, or put their own interests ahead of yours.

In a similar vein, the camaraderie of good friends can generate a lot of enthusiasm for certain ideas or investment choices. But when it comes to money, as many behavioral finance studies have shown, emotions around money can lead people astray. It’s usually smarter to have a few guardrails in place, to guide any group.

What to Talk About Before You Invest With Friends

Before pooling resources, it may be wise to talk a little about how you each approach investing.

Maybe one friend is a Warren Buffett aficionado, while another is eager to invest in crypto.

Maybe one friend is eager to hit a specific financial goal while another is looking at investing with friends as a way to start an investment club to diversify their portfolio.

Before pooling resources, it’s a good idea to talk about how you each approach the market.

It can also be a good time to talk through all the what-ifs you can think of, including:

• What if our investments lose money?

• What if one of us needs the money for an emergency?

• What if more people want to invest in the future?

Finally, make sure your goals are aligned. Are you looking for specific investment opportunities?

Some friend groups get together for what is called impact investing, or socially conscious investing — investing in companies that have positive social, environmental, and environmental impact on the world.

Other friends may pool their money to gain access to investment opportunities that may have a minimum investment threshold, such as private investments and alternative investments like venture capital.

Once you’re all on the same page, you can then assess different methods of investing as a group of friends.

How Do You Start Investing With Friends?

There are a few different ways to start investing with friends.

Set Up a Brokerage Account

One way to invest with friends is to designate someone as the account holder, and have them open a brokerage account online with your group’s pooled resources. But that method may not allow for safeguards to protect your capital, or empower each individual investor with decision-making power.

Opening a brokerage account for your pooled funds may work for groups where there is one designated, trusted leader who manages the execution of trades, and where everyone involved agrees about the group investing style, whether active investing or some other strategies.

💡 Recommended: How to Open a Brokerage Account

Create an LLC

You may also choose to invest with friends as a show of faith for a mutual friend or family member’s startup or business venture. In this case, it can be helpful to create a limited liability company (LLC). And LLC can provide a structure for raising and investing cash, as well as making sure there is an agreement laid out as to potential returns on the investment and whether investors will have any power in the direction and decisions the company makes.

In creating an LLC, it may be helpful to seek legal advice to help create a contract so that everyone is on the same page and there is no confusion as to how money is used and what the return on investment will look like for investors.

Investing in Real Estate With Friends

Real estate can be expensive, so pooling your resources with friends may make sense.

There are a number of different ways to invest in real estate with friends. Among the most common:

• You might buy a long-term investment property, like a rental property.

• You could buy a short-term investment property, where you renovate and flip a home, for example.

• You could invest in a shared property where you and your friends live, or a property where one or more friends might live, with an agreement to sell it at a certain point, ideally for a profit.

However you approach your joint real estate venture, be sure to do research into the different types of business arrangements and real estate agreements that might suit your aims. Given how expensive and complicated real estate can be — even owning a shared home — and how many legalities could come into play, it’s best to get professional advice.

Investing in a Friend’s Business

While history abounds with successful businesses started by friends, think carefully before investing your own funds in a friend’s new venture. Ideally, you want to approach the question of whether to invest in your friend’s enterprise with your business hat on, so to say.

• Wait to be asked. Just because your friend is on fire about their new startup doesn’t mean they want you or your money involved. If they ask for your advice, rather than money, that could be a lower-stakes way to provide support.

• Kick the tires. If your friend does want you to invest, pretend you work on Wall Street. Read their business plan. Ask hard questions: how they’re raising capital, what kind of audience they’ve identified, and so on. Before deciding to put your own money into a project, you want to know it’s solid.

• Sign on the dotted line. Don’t attempt to do business with friends over a beer and a handshake. Lay out all the terms and expectations in a contract that protects all parties.

• Set emotional boundaries. You’re friends first, so have some rules in place that help you navigate when and where to talk business.

The Takeaway

For many people, there are tangible benefits to investing with friends: shared wisdom and experience, supporting each other’s financial goals, and in some cases the profits that may come from your joint venture. But there are disadvantages as well. It can be tempting to trust friends to do the right thing, when having a contract might provide more structure and clearcut consequences if an investment project goes awry.

There are many things to consider before investing with friends, and many different ways to go about it. In some cases, you might want to create an LLC with friends, to safeguard your own interests and make sure everyone is in agreement on the details of the arrangement.

If you’re not quite ready to invest your money directly with other people, and you want to gain more experience and wisdom on your own, you can start by actively trading stock with SoFi Invest.

SoFi’s investing platform has a feature available for Active Investing members that allows them to opt-in to share their investment portfolios, so you can see how your friends are doing and the market moves they’re making. Dollar amounts are hidden, but you can follow the holdings of friends who also have opted-into this feature, look at watchlists, and comment on trades.

You can also see you and your friends on a dynamic leaderboard with other members. This is a seamless way to see your friends’ investing behaviors, ask questions, and connect on investment decisions — while still keeping your finances separate.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

Is it a good idea to invest with a friend?

Investing with friends can offer some distinct advantages, including the power of combined finances, similar values, and basic trust. On the downside, though, friends might be tempted to do business with a handshake, rather than spelling out details and expectations clearly in an agreement or contracts that protects everyone involved.

Can a group of friends invest in stocks?

Friends can invest in stocks together in a few different ways. A set of friends can form an investment group or club, where they pool money and agree on a stock-picking strategy. It’s also possible for friends to invest in fractional shares.

How do I start an investing group with friends?

There are many different books and websites that can offer steps and guidelines for setting up an investment group with your friends.

SoFi Invest®

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

May

2022

Why Are Bitcoin and Other Cryptos So Volatile?

By Matthew Zeitlin | Financial Independence, Growing Wealth, invest, Investing | Comments Off

In 2020 and 2021, one of Bitcoin’s defining features was that its price always seemd to be rising.

In reality, however, the price of Bitcoin doesn’t always go up. To get these screaming vertical price increases, there needs to be some death-defying falls as well. Bitcoin’s very volatility makes this popular crypto a tempting investment for some, and a quite dangerous one for others. Trading crypto might not be for all investors — especially those with a low tolerance for risk.

Bitcoin Price Volatility

Graph: Bitcoin volatility from 2017-2021

There’s no denying that cryptocurrencies, including Bitcoin, are volatile. For instance, in the first half of 2021, Bitcoin doubled in value, reaching a record-breaking high price of $64,000. But it tumbled back to less than $30,000 during the summer months. Then in November, Bitcoin’s price soared again; this time to $68,000 (for another all-time high) only to slip to below $35,000 in January 2022.

And this is just one example. Since its launch in 2009, Bitcoin’s price history has been impressive and experienced more than a few conspicuous crashes.

Volatility is essentially a given across all types of cryptocurrencies, given the general air of legal, political, institutional, and technological uncertainty that floats around them. But it’s more noticeable with Bitcoin. Bitcoin was the very first cryptocurrency created. Not only is it the most expensive crypto, but likely the most visible, and has become a flagship for the entire crypto/blockchain space. Arguably, Bitcoin could be the coin that led the government, the public, and traditional financial services companies to take cryptocurrencies seriously. Increasingly, millions of ordinary people view Bitcoin as a vehicle for investing, trading, and saving. But before investing in cryptocurrency, an investor would want to consider its volatility seriously.

Why Does Cryptocurrency Volatility Matter?

There’s a reason that nearly anyone who’s well-versed in cryptocurrency would caution novice crypto investors to invest no more than you’re willing to lose. With a highly volatile asset like cryptocurrency, an investor’s overall portfolio value could suddenly shoot much higher or much lower than they would expect, or are prepared for, based on big changes in its price.

Bitcoin is not the only cryptocurrency to experience big price swings that can lead to large gains or losses for investors. Volatility does not play favorites, and most crypto coins, even more familiar assets, like plain vanilla stocks, can experience the phenomenon of volatility. From the second-largest crypto, Ethereum — and popular established coins like Dogecoin and Uniswap — to crypto projects you might not know, all have experienced price volatility.

Is Bitcoin Particularly Volatile?

There are at least a few reasons why Bitcoin’s price is so unstable.

Liquidity

In financial markets, liquidity is a concept that relates how much a given purchase or sale of an asset will move its overall price. Liquidity, in general, supports overall asset values. Say you have an item that costs $500 but when you go to sell it, there’s no one to buy it; In that case, the $500 price tag is not very meaningful. Low liquidity may be rendering the price of Bitcoin unstable.

A particular concern with Bitcoin is that a huge portion of all the Bitcoin circulating in the world — at this writing, more than 18.5 million bitcoin — will never be bought or sold by anyone. This could be because the coin is stranded in wallets for which the private keys have been forgotten or because they’re held by investors who will never sell, no matter the price. Moreover, Bitcoin’s existence is finite; no more than 21 bitcoin will ever be mined.

By shrinking the amount of Bitcoin in circulation beyond the limits built into the system, Bitcoin’s liquidity could dry up. This means that movements to buy or sell could quickly influence its price, driving it up or down violently.

Speculation

One of the biggest debates surrounding cryptocurrencies is, what’s it for, exactly? Why are people buying it? For individuals who live in countries with unstable or despotic governments, Bitcoin can be a lifeline of stable value. But for many, it is not an especially convenient payment mechanism compared to the fiat currency of existing banking systems.

And yet, many people are buying Bitcoin and willing to pay ever-higher prices for it. The main reason seems that they expect the price to get even higher in time. Some people think the price will go up because Bitcoin is protected against inflation because of its 21-million cap on coin. Some expect wider adoption of Bitcoin as a payment protocol. And some expect it to become widely used by financial services institutions as a store of value.

The FOMO Factor

Essentially, interest in Bitcoin is generated by the idea that other people are going to buy it in the future, at a higher price than it’s selling for today. This expectation is fed by regular headlines about a company or celebrity buying into Bitcoin and the massive profits people are generating from Bitcoin they bought years — or even weeks — ago. In the crypto community, this behavior is known as fear of missing out (FOMO). Speculative investing like this often leads to volatility, because the price can turn down as sharply as it turns up.

At this time, many analysts believe that the questions surrounding cryptocurrency, as well as FOMO, are precisely what are keeping Bitcoin’s prices high. An asset’s price likely would swing if a large portion of investors are trying to get in front of buyers who come in later. Those who buy a crypto immediately when it comes to market could dump the coin just as quickly. This could happen if an investor made a profit, or they no longer believe that more investors will buy into the crypto.

The Takeaway

Bitcoin’s volatility is based on at least two factors: its potentially low liquidity, and the plethora of unanswered questions about crypto, a still-new asset class. Investors and anyone who follows the news are aware of shocking highs and lows in Bitcoin’s value.

FAQ

In general, are cryptocurrencies more volatile than stocks?

Yes. Investing in the stock market has been a mainstay of the U.S. economy since the late 1700s. Stocks are also regulated, subject to oversight by the SEC, and other government agencies. Cryptocurrencies as an asset class are quite new, not fully regulated, and do not yet have a proven track record in U.S. markets. As we discussed, crypto is considered a speculative investment. Complex assets — like high-yield bonds, options, mortgage-backed securities, and other derivatives, including crypto — are subject to greater volatility than are plain vanilla stocks.

Which cryptocurrency is the most volatile?

The answer: It changes every day. And, volatility is not selective. Popular coins, like Bitcoin (BTC) and Ethereum (ETH), take their turns at being “most-volatile” just as often as do the tiny cryptos you might not have
heard of . Cryptocurrency’s volatility has spawned a number of reliable indexes that track and report its daily price fluctuations, including Yahoo Finance and Shufflup .

Is volatility a good thing for crypto?

Volatility is neither good nor bad. Rather, it’s a phenomenon that exists in all financial markets for a mix of reasons. Cryptocurrency skeptics might see crypto’s volatility as a danger sign, a reason to stay away. However, sometimes volatility can benefit a new fast-growing asset, like crypto.

This is happening currently, with profit-seeking traders and wealthy venture capitalists streaming toward crypto. Venture capital funding can help seed new start-ups and advance technical innovation. And new money flowing into a sector often brings heightened liquidity, which makes for healthy financial markets.

The FOMO factor, which we discussed above, and just plain curiosity also can have a positive effect on crypto. For example, some large traditional financial services (TradFi) institutions that were prior crypto-naysayers are now showing an interest in the crypto sector.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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Mar

2021

How Do Dividends Work?

By SoFi | Growing Wealth, Investing | No Comments

Dividends are payments to stockholders that some companies make as a way of sharing their profits. They are one of the ways that investors can make money from stocks and build long-term wealth.

Dividends are usually cash payments that are paid on a regular basis. Investors can draw on these payments as income or reinvest them in the stock market. Here’s a closer look at how dividends work and how investors can take advantage of them.

What Are Dividends?

Dividends are shares in a company’s profits that are paid to stockholders in cash, and in some rare instances stock. They represent one of the most common ways investors can make money from stock aside from selling appreciated stock.

Dividends can generally be divided into two broad categories: regular and special dividends.

Regular Dividends

Regular dividends are those which the company expects to pay out on a recurring basis. Typically, a company will set regular dividends at a value they expect to be able to pay, even when times are tough.

Special Dividends

Special dividends are usually one-time payments that follow special circumstances. For example, if a company sells an asset and has no immediate need for the proceeds, they may use them to fund a special dividend.

Why Do Companies Pay Dividends?

When a company starts to earn more than it needs to cover operating expenses (one of many line items in a profit and loss statement) and reinvest in its own business, it may start paying out dividends. Typically, companies in this situation are mature and well-established, requiring little reinvestment of capital to grow.

Offering dividends can be a smart move on the company’s part. They can signal that the business is robust and financially healthy, drawing the attention of investors looking for income, which in turn may potentially drive up share prices.

How Do Dividends Get Paid Out?

Dividends are usually paid out quarterly—though some pay out monthly. They are paid on a per-share basis, typically in cash. So, for example, if a company is paying a dividend of $0.15 per share and you own 100 shares, you’ll receive $15.

Stock dividends are issued as a percentage of the shares you own. So if you receive a 5% stock dividend and you own 100 shares, you’ll receive five shares for a total of 105 shares.

Companies that pay dividends usually declare them a number of weeks before paying them out, when the board of directors makes an official announcement that a dividend will be paid. When it come to dividend payment, there are a number of important dates to be aware of:

Declaration date: The day the board of directors makes its official announcement that it has decided to make a future dividend payment.
Payment date: The date on which dividend payments are made to shareholders—either with a check in the mail or through money transferred to your brokerage account.
Record date: The date by which you must be an owner of the dividend-paying company’s stock in order to receive the declared dividend.
Ex-dividend date: The ex-dividend date is usually the day before the record date. On this day, stocks are trading without the dividend. In order to receive a declared dividend, you must have bought stock the day before the ex-dividend date, and you must be an official owner of the stock by the record date. Investors who purchase the stock on or after the ex-dividend date will not receive the upcoming dividend. Rather they will have to wait until the next dividend payment is announced.

Are Dividends Guaranteed?

Some investors like to structure their investments so that they can live off dividend income. However, it’s important to note that though dividend payments are usually paid on a regular basis, they are not guaranteed.

Rather they are paid at the discretion of the company board of directors, which can change the amount of the payment or cancel it altogether. If a company decides to cut dividends, there is a hierarchy of payment they will usually consider. They will typically pay bondholders first, followed by preferred stockholders. Common stockholders are paid last.

Which Companies Pay Dividends?

Generally speaking, large, mature companies that are not currently focused on fast growth offer dividends. For example, most companies in the S&P 500 Index, which represents the 500 largest U.S. companies by market capitalization, pay dividends.

Younger, fast-growing companies are unlikely to offer dividends. Instead they tend to focus on reinvesting earnings to grow their business, open more stores, build new facilities, or hire more employees.

How to Choose Dividend Stocks

When considering which dividend stocks to buy, investors may want to look at dividend yield, which measures how much income they will receive for every dollar invested in the stock. The higher the yield, the more income they can expect.

Investors may also want to consider the dividend payout ratio, the portion of a company’s income that goes toward paying dividends. As a rule of thumb, investors might want to look for a payout ratio of 80% or less. Any higher and the company may be in danger of being unable to make its dividend payments.

How Do Dividends Affect Stock Prices?

In the short-term, dividends can drive down the price of a stock a little bit. That’s because investors who buy the stock on or after the ex-dividend date don’t get to benefit from the upcoming round of dividends. So they may be reluctant to pay a premium for a reward in which they don’t get to take part. In fact, some specialists may mark down the price of a stock by the amount of the dividend on the ex-dividend date.

Stock prices may also fall when a company announces a reduction in their dividend, which could signal that they expect weak sales or lower profits due to other facts like higher operating costs. If investors think a company is headed for hard times, they may be tempted to sell, which would drive down the stock’s price.

On the flip side of that coin, when a company offers a higher dividend or a special dividend, investors may see it as a harbinger of financial health, which can make the stock more attractive to investors and drive up the price.

How Are Dividends Taxed?

If you receive dividends in a taxable brokerage account, they are considered taxable income and will be taxed at your regular income tax rate or as long-term capital gains. Dividends that are paid inside tax-advantaged savings accounts—such as traditional and Roth IRAs, 401(k)s, and Coverdell ESAs —are not taxed.

A dividend is eligible for the lower capital gains rate if it is a “qualified dividend.” To meet this standard, a dividend must me the following criteria:

•  It must be paid by a U.S. corporation or qualified foreign corporation.
•  It must be an ordinary dividend and not capital gains distributions or dividends from tax-exempt organizations.
•  You must have held the stock for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date.

The Takeaway

Investing in stocks that offer dividends can be a good strategy for investors looking for income and to build their wealth potentially faster than with non-dividend stocks. The reasoning: Investors who reinvest their dividends can buy additional shares of stock, which in turn entitles them to more dividends in the future.

If you’re ready to add dividend-paying stocks to your portfolio, check out SoFi Invest®. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

Find out how to get started with SoFi Invest.

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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Should You Invest With Friends?

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Set Up a Brokerage Account

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FAQ

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Can a group of friends invest in stocks?

How do I start an investing group with friends?

Why Are Bitcoin and Other Cryptos So Volatile?

Bitcoin Price Volatility

Why Does Cryptocurrency Volatility Matter?

Is Bitcoin Particularly Volatile?

Liquidity

Speculation

The FOMO Factor

The Takeaway

FAQ

In general, are cryptocurrencies more volatile than stocks?

Which cryptocurrency is the most volatile?

Is volatility a good thing for crypto?

How Do Dividends Work?

What Are Dividends?

Regular Dividends

Special Dividends

Why Do Companies Pay Dividends?

How Do Dividends Get Paid Out?

Are Dividends Guaranteed?

Which Companies Pay Dividends?

How to Choose Dividend Stocks

How Do Dividends Affect Stock Prices?

How Are Dividends Taxed?

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