InvestGen Archives | Page 10 of 83

Q: What Is Liquidity In Stocks?

Liquidity generally refers to how quickly an investment can be bought or sold and converted into cash. The easier an investment is to sell, the more liquid it is.

Q: How Liquid Are Different Assets?

Cash is the most liquid asset. An investment property is an example of a relatively illiquid asset. Stocks generally fall on the relatively liquid side of the liquidity spectrum.

Feb

2024

What Is Liquidity In Stocks?

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Liquidity in stocks generally refers to how quickly an investment can be bought or sold and converted into cash. The easier an investment is to sell, the more liquid it is. Plus, liquid investments generally do not charge large fees when you need to access your money.

For the average investor, liquidity is an important consideration when building a portfolio, as it’s an indicator of how easy it is to access their savings. That can be important to know and understand when sizing up your overall strategy.

Key Points

• Liquidity in stocks refers to how quickly an investment can be bought or sold and converted into cash.

• Market liquidity refers to how quickly a stock can be turned into cash, while accounting liquidity relates to meeting financial obligations.

• Stocks are generally considered liquid assets, but some stocks may be less liquid, especially those traded on foreign exchanges.

• Share turnover and bid-ask spread are metrics used to assess a stock’s liquidity.

• Liquidity risk is the risk of not finding a buyer or seller for assets, which can affect prices.

Types of Liquidity

Liquidity comes in two forms: Market liquidity and accounting liquidity. Here’s how the two are different.

Market Liquidity

Market liquidity refers to how quickly a stock can be turned into cash. High market liquidity means there’s a high supply and demand for an asset. That, in turn, makes it easy for buyers to find sellers and vice versa. As a result, transactions can be completed quickly, even when stock values are dropping.

Accounting Liquidity

Accounting liquidity is related to an individual’s or company’s ability to meet their financial obligations, such as regular bills or debt payments.

For an individual, being liquid means they have enough cash or marketable assets (such as stocks) on hand to meet their obligations.

Companies measure liquidity slightly differently by comparing current assets and debt. In addition to cash and marketable assets, current assets also include inventories and accounts receivable, the money customers owe on credit for goods or services they’ve purchased.

Investors may pay attention to company liquidity if they are researching that company’s stock as a potential buy. Companies with higher liquidity may be in better shape than those in risk of defaulting on their debt.

💡 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.

How Liquid Are Different Assets?

An investor’s financial portfolio may be made up of a number of different assets of varying liquidities, including cash, stocks, bonds, real estate, and savings vehicles like certificates of deposit (CDs). Cash is the most liquid asset; there is nothing an investor needs to do to convert it into spendable currency.

On the other hand, an investment property is an example of a relatively illiquid asset, as it might take a long time for an investor to sell it should they need access to their money.

CDs are also relatively illiquid assets because they require investors to tie up their money for a preset period of time in exchange for higher interest rates than those available in regular savings accounts. Individuals who need their money early may have to pay hefty fines to access it.

Stocks generally fall on the relatively liquid side of the liquidity spectrum. Stocks that are easy to buy and sell and said to be highly liquid. Stocks with low liquidity may be tougher to sell, and investors may take a bigger financial hit as they seek buyers.

What Is Liquidity Risk?

Liquidity risk is the risk that an individual won’t be able to find a buyer or seller for assets they wish to trade during a given period of time, which can lead to adverse effects on the price. Liquidity risk is higher for complex investments or investment vehicles like CDs that may charge penalties to liquidate or access funds early.

Are Stocks a Liquid Asset?

For the most part, stocks that are traded on a public exchange are considered liquid assets. Some stocks, like those traded on foreign exchanges, may be less liquid as it takes more time to execute a trade.

Generally speaking, when an individual wishes to execute a trade, they use a brokerage account to issue a buy or sell order. The broker then helps match the individual with other buyers and sellers hoping to take the opposite action.

This process can take a little bit of time. Most stock trades settle within a two-day period. A stock trade executed on a Wednesday would typically settle on Friday. Settlement is the official transfer of stocks from a seller’s account to the buyer’s account, and cash from the buyer to the seller.

Because it can take some time for trades to be executed, there can be a difference in price between when an individual places an order and when that order is fulfilled.

How to Calculate a Stock’s Liquidity

One way to figure out a stock’s liquidity is by looking at a metric known as share turnover. This financial ratio compares the volume of shares traded and the number of outstanding shares. A stock’s volume is the number of shares that have been bought or sold over a given period. Outstanding shares refer to all of the shares held by a company’s shareholders.

Higher share turnover indicates high liquidity; investors have an easier time buying and selling. Investors might want to pay close attention to low share turnover, as this can indicate they may have a difficult time selling shares if they need to.

Another measure of a stock’s liquidity is the bid-ask spread. Bid price is the price an individual is willing to pay at a given point in time. The ask price is the price at which a buyer is willing to sell. The bid-ask spread is the difference between the two.

For highly liquid assets, the bid-ask spread tends to be pretty small — as little as a penny. This indicates that buyers and sellers are generally in agreement over what the price of a stock should be. However, as bid-ask spread grows, it is an indication that a stock is increasingly illiquid.

A wide spread can also indicate that a trade may be much more expensive to execute. For example, there may not be enough trade volume to execute an entire order at one price. If prices are rising, an order can become increasingly pricey.

💡 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.

Examples of Liquid Stocks

The most liquid stocks tend to be those that receive the most interest from investors. The large companies that are tracked by the S&P 500 Index.

Why Stock Liquidity Is Important for Investors

The relative liquidity provided by stocks can be a boon to investors. Stocks help provide the growth needed for investors to meet their savings goals. They are also relatively easy to buy and sell on the market, allowing investors to access their savings quickly when they need it.

The Takeaway

Liquidity is a measure of the ability to turn assets into cash without losing value. So it’s an important metric for investors to pay attention to as they construct their portfolios. But liquidity is just one of many factors to consider when investing.

Investors may want to know how liquid their holdings are so that they can choose the appropriate mix of investments that align with their risk tolerance. It may be comforting to some to know that they can sell investments with relative ease, rather than have their money tied up for the long-term.

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).

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

What is good liquidity for a stock?

Good liquidity for a stock refers to an investor’s ability to sell the stock in exchange for cash. If a stock is liquid, then it should be relatively easy to sell. If a stock is illiquid, or has bad liquidity, it may be more difficult.

What is a “Liquidity Ratio?”

A liquidity ratio is a financial ratio that can help an investor determine a company’s ability to pay off its debt obligations, particularly in the short-term. There are several liquidity ratios that can be utilized.

Is a higher liquidity better?

Generally, yes, a higher liquidity is better for investors, as it can signal that a company is performing well, and that its stock is in demand. It can also be easier for an investor to sell that stock in exchange for cash.

Photo credit: iStock/insta_photos

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0523024

Feb

2024

What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By Austin Kilham | invest, Investing, Money & Life, Preparing for Retirement | Comments Off

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career

Key Points

• When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.

• If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.

• If you have more than $5,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.

• If you quit or are fired, you may lose employer contributions that are not fully vested.

• It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

Quick 401(k) Overview?

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out. In 2024, employees can contribute up to $23,000 a year in their 401(k)s, up from $22,500 in 2023. Employees age 50 and older can make catch-up contributions of $7,500 a year for a total of $30,500 in 2024 and $30,000 in 2023.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employees must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

The more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up. You may also suggest a specific IRA for the rollover.

If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) and it is an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Recommended: How an Employer 401(k) Match Works

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Recommended: What To Invest In Besides Your 401(k)

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $5,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

You may also be interested in:

Guide to Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

When Can You Withdraw From Your 401(k)?

Photo credit: iStock/chengyuzheng

Feb

2024

When Do You Pay Taxes on Stocks?

By Kelly Boyer Sagert | Growing Wealth, invest, Investing | No Comments

Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale. But there are other circumstances when stock holdings may generate a tax liability for an investor, too. This is important for investors to understand so that they can plan for the tax implications of their investment strategy. Knowing how your investments could impact your taxes may better prepare you for tax season and allow you to make more informed investment decisions.

First, an important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.

Key Points

• Short-term capital gains tax rates for tax years 2023-2024 range from 10% to 37% based on taxable income.

• Long-term capital gains tax rates for tax years 2023-2024 range from 0% to 20% based on taxable income.

• Short-term capital gains tax rates for married couples filing jointly are higher than for single individuals.

• Long-term capital gains tax rates for married couples filing jointly are the same as for single individuals.

• The tax rates provided are for the specified tax years and are subject to change.

Do You Have to Pay Taxes on Stocks?

Do you need to pay taxes on stocks? It depends. Typically, as mentioned, investors would need to pay capital gains taxes when they sell a stock – the sale of which triggers a taxable event. But broadly speaking, yes, investors need to pay taxes on their stock holdings. The main question and what investors need to figure out, is when do you need to pay taxes on stocks, and what other actions or incidences, besides a sale, could trigger a taxable event.

When Do You Pay Taxes on Stocks?

There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay taxes on those earnings.

Capital gains even have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate – more on that below.

You will only owe capital gains taxes if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes and ROI on your investments, with taxes taken into account.

There are two types of capital gains tax:

Short-term Capital Gains

Short-term capital gains tax applies when you sell an asset that you owned for less than one year, and that gained in value within that time frame. These gains would be taxed at the same rate as your typical tax bracket, so they’re important for day traders to consider.

Short-Term Capital Gains Rates for Tax Years 2023 – 2024
	Single Taxable Income		Married Couple Filing Jointly Taxable Income
	2023	2024	2023	2024
10%	$0 – $11,000	$0 – $11,600	$0 – $22,000	$0 – $23,200
12%	$11,001 – $44,725	$11,6001 – $47,150	$22,001 – $89,450	$23,201 – $94,300
22%	$44,726 – $95,375	$47,151 – $100,525	$89,451 – $190,750	$94,301 – $201,050
24%	$95,376 – $182,100	$100,526 – $191,950	$190,751 – $364,200	$201,051 – $383,900
32%	$182,101 – $231,250	$191,951 – $243,725	$364,201 – $462,500	$383,901 – $487,450
35%	$231,251 – $578,125	$243,726 to $609,350	$462,501 – $693,750	$487,451 to $731,200
37%	$578,126 or higher	$609,351 or higher	$693,751 or higher	$731,201 or higher

Long-term Capital Gains

Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%. Overall, long-term capital gains tax rates are typically lower than those on short-term capital gains.

Long-Term Capital Gains Rates for Tax Years 2023 – 2024
	Single Taxable Income		Married Couple Filing Jointly Taxable Income
	2023	2024	2023	2024
0%	$0 – $44,625	$0 – $47,025	$0 – $89,250	$0 – $94,050
15%	$44,626 – $492,300	$47,026 – $518,900	$89,251 – $553,850	$94,051 – $583,750
20%	$492,301 or higher	$518,901 or higher	$553,851 or higher	$583,751 or higher

Capital Losses

If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains.

You can also apply up to $3,000 in investment losses to offset regular income taxes.

Tax-loss Harvesting

The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.

Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Taxes on Investment Income

You may have taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.

Dividends

You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings. Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.

There are two broad categories of dividends: qualified or nonqualified/ordinary. The IRS taxes non-qualified dividends at your regular income tax bracket. The rate on qualified dividends may be 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually less than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.

Interest Income

This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income level. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.

Net Investment Income Tax (NIIT)

Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for filers filing jointly. Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

When Do I Not Have to Pay Taxes on Stocks?

Again, this should first and foremost be a discussion you have with your tax professional. But there are a few situations you should know about where you often don’t pay taxes when selling a stock. For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when you buy and sell stocks inside the account. However, if you were to sell stock in one of these accounts and then withdraw it, you could owe taxes on the withdrawal.

4 Strategies To Pay Lower Taxes on Stocks

If the answer to “Do you have to pay taxes on stocks?” is “yes” for your personal financial situation, then the question becomes how to pay a lower amount of taxes. Strategies can include:

Buy and Hold

Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.

Tax-loss Harvesting

As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.

Use Tax-advantaged Accounts

Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.

Refrain From Taking Early Withdrawals

Avoiding the temptation to make early withdrawals from your 401(k) or other retirement accounts.

Taxes for Other Investments

Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.

Mutual Funds

Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.

Property

“Property” is a broad category, and can include assets like real estate. The IRS looks at property all the same, however, from a taxation standpoint. In short, property is subject to capital gains taxes (not to be confused with “property taxes,” which are something else entirely. In effect, if you buy a house and later sell it for a profit, that gain would be subject to capital gains taxes.

Options

Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to options trading activity – it may be wise to consult with a financial professional for more details.

Investing With SoFi

For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.

That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.

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 much do you pay taxes on stocks?

How much an investor pays in taxes on stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.

Do you get taxed when you sell stocks?

Yes, investors do generate a tax liability when they sell a stock in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use it to offset tax liabilities generated by other capital gains.

How do you avoid taxes on stocks?

There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy, opting not to take early withdrawals, and utilizing tax-advantaged accounts.

SOIN0723013

Feb

2024

What Are High-Net Worth Individuals?

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

A high net worth individual (HNWI) is generally considered to be someone who has $1 million or more in investable assets. That includes liquid assets such as cash or cash equivalents.

Someone who has a high net worth may rely on specialized financial services for money management. For example, they may work with a wealth manager or open accounts at a private bank. In terms of financial planning, the needs of high net worth individuals may include estate planning, investment guidance, and tax management.

Achieving a high net worth is something that can be done through strategic investing and careful portfolio building. It’s important to keep in mind that high net worth individuals may have access to certain investments that the everyday investor would not. Minimizing liabilities is another part of the wealth-building puzzle, as net worth takes debt into account alongside assets.

Key Points

• A high net worth individual (HNWI) is someone with $1 million or more in investable assets, including cash or cash equivalents.

• HNWIs may rely on specialized financial services like wealth managers or private banks for money management, estate planning, investment guidance, and tax management.

• Different metrics, such as income, investable assets, and net worth (assets minus liabilities), can be used to define high net worth individuals.

• The SEC requires registered advisors to disclose information about high net worth individuals on Form ADV, and accredited investors are also considered high net worth individuals.

• HNWIs may enjoy benefits like reduced fees, discounts on financial services, access to exclusive investments, and special perks and events.

What Defines a High Net Worth Individual?

When it comes to the high net worth definition, there are different metrics that can be used to calculate net worth and determine whether someone falls under the high net worth umbrella. Those can include a person’s:

• Income

• Investable assets

• Total net worth when liabilities are deducted from assets

The Securities and Exchange Commission (SEC) requires registered advisors to provide information about high net worth individuals on Form ADV. Specifically, the form asks advisors to list how many clients they serve who have $750,000 in investable assets or a $1.5 million net worth.

The SEC can also refer to high net worth individuals when discussing accredited investors. An accredited investor is defined as having:

• Earned income of $200,000 or more (or $300,000 for couples) in each of the two prior years, with a reasonable expectation of the same income in future years

• Net worth of over $1 million either alone or with a spouse, excluding the value of a primary residence

What is considered a high net worth individual to those who work with them? Private banks or wealth managers who serve high net worth individuals might choose to define them differently. For example, someone who wants to open an account with a private bank might need to have $5 million or $10 million in investable assets to qualify. Someone who has that much in assets may be relabeled as “very high net worth” instead. And at higher levels of assets, they enter the realm of ultra high net worth.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

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

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Benefits Afforded to HNWIs

High net worth individuals may get a number of special benefits. For instance, they might qualify for reduced fees and discounts on financial services like investments and banking. They may also be granted access to special perks and events.

HNWI can also invest in things other investors or the general public can’t, such as hedge funds, venture capital funds, and private equity funds.

HNWI Examples & Statistics

The super rich, or HNWI, are tracked by Forbes on the Real-Time Billionaires List, which is updated daily. As of August 31, 2023, these were the HNWI at the top if the list:

• Elon Musk with a net worth of $248.8 billion

• Bernard Arnault and family with a net worth of $208 billion

• Jeff Bezos with a net worth of $160.9 billion

• Larry Ellison with a net worth of $152.3 billion

• Warren Buffet with a net worth of $121.1 billion

How Is Net Worth Calculated?

Wondering how to find net worth? It’s a relatively simple calculation. There are three steps for figuring out net worth:

1. Add up assets. These can include:

◦ Bank account balances, including checking, savings, and certificates of deposit

◦ Retirement accounts

◦ Taxable investment accounts

◦ Property, such as real estate or vehicles

◦ Collectibles or antiques

◦ Businesses someone owns

2. Add up liabilities. Liabilities are debts owed. For example, a home’s value can be considered an asset for net worth calculations. But if there’s a mortgage owing on it, that amount has to be entered into the liabilities column.

3. Subtract liabilities from assets. The remaining amount is an individual’s net worth.

Net worth can be a positive or negative number, depending on how much someone has in assets versus what they owe in liabilities.

Net Worth vs Liquid Net Worth

In simple terms, net worth is the difference between assets and liabilities. Liquid net worth, on the other hand, is the difference between liquid assets and liabilities. A liquid asset is one that can easily be sold or used to invest. So cash in a savings account is an example of a liquid asset while investments in a real estate investment trust (REIT) would be illiquid since they can’t be sold at short notice.

What Is an Ultra High Net Worth Individual?

Someone who fits the definition of an ultra high net worth individual (UHNWI) generally has personal financial holdings or assets of $30 million or more. People who are considered to be ultra high net worth individuals are among the top 1% wealthiest in the world.

So what is the net worth of the top 1%?

According to a report from Knight Frank, the typical net worth of the 1% falls far below the $30 million in assets required for ultra high net worth status. For example, in the U.S. someone would need $4 million in wealth to join the ranks of the top 1%. They’d need $7.9 million to belong to the top 1% in Monaco.

But what about the top 0.1%? Again, the level of wealth needed to qualify is still below the $30 million cutoff required for an UHNWI. In the U.S., you’d need $25.1 million to be considered part of the 0.1%. This is the highest amount of assets needed to qualify among the countries included in Knight Frank’s research.

💡 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.

How to Get a Higher Net Worth

Reaching high net worth status can be a lofty goal but it’s one many HENRYs — high earner not rich yet — work toward. The typical HENRY makes most or all of their income from working. While they may earn an above-average income, they may not have sufficient disposable income to start building wealth to increase their net worth.

There are, however, some ways to change that. For example, someone who earns a higher income but doesn’t have the higher net worth to reflect it may consider things like:

• Paying off student loans or other debts

• Relocating to a less expensive area to reduce their cost of living

• Rethinking their tax strategy so they’re able to keep more of their income

• Finding ways to increase income

Coming up with a solid investment strategy is also important for boosting net worth. That includes diversifying to manage risk while investing in assets that are designed to produce income. For example, that might include such things as:

• Purchasing shares of dividend stocks

• Enrolling in a dividend reinvestment plan (DRIP)

• Buying dividend exchange-traded funds (ETFs)

• Investing in REITs or real estate mutual funds

Creating multiple streams of income with investments or starting a side hustle while also reducing liabilities can help with making progress toward a higher net worth. At the same time, it’s also important to take advantage of wealth-building assets you may already have on hand.

For example, if you have access to a 401(k) or similar plan at work, then making contributions can be an easy way to increase net worth. If your employer offers a company matching contribution you could use that free money to help build wealth.

The Takeaway

High net worth individuals are typically described as people who have $1 million or more in investable assets. Those with more than $5 to 10 million in investable assets may be labeled as “very high net worth”, and those with more than $30 million are generally considered ultra high net worth individuals.

Individuals with a higher net worth often consider time to be an asset in itself. The thinking goes, the sooner you begin investing, the better.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What are different types of high-net-worth individuals?

There are several types of high net worth individuals. Those who are high net worth have more than $1 million. Individuals with about $5 million are considered very high net worth. If a person has more than $30 million dollars they are considered ultra high net worth.

Where are most of the HNWIs located?

North America has the most high net worth individuals. There are 7.9 million HNWI in North America. The Asia-Pacific region has 7.2 million high net worth individuals, and there are 5.7 million HNWI in Europe.

Do high-net-worth individuals include 401(k)?

Yes. All of your different retirement accounts, including your 401(k), are included as assets when calculating high net worth.

Photo credit: iStock/Cecilie_Arcurs

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.

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.

SOIN0723171

Feb

2024

What Is Leverage in Finance?

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

Leverage in finance involves using a relatively small amount of capital to make larger trades or investments, increasing the potential of larger returns. In the world of finance, it’s critical to understand leverage if you plan to day trade or make other types of short-term investments, and the additional risks involved.

In general, leverage means doing a lot with a little. Think about how you may use an actual, physical lever to turn a switch, for instance. The switch itself may be small, and require a turn that’s a quarter of an inch to flip from off to on. But by using a lever — which is much bigger, physically, than the switch itself — the work becomes easier.

Key Points

• Leverage in finance involves using a small amount of capital to make larger trades or investments, potentially increasing returns.

• Leverage can be achieved through borrowing money or trading on margin, allowing investors to make increased dollar investments.

• While leverage can amplify gains, it also magnifies losses and comes with additional risks and costs.

• Different types of leverage exist, including financial leverage used by businesses to raise capital and operating leverage used to analyze fixed and variable costs.

• Leverage can be used in personal finance, such as taking out a mortgage, and is also utilized by professional traders to potentially increase profits.

What Is Leverage?

In finance, leverage refers to using a small amount of capital to do a relatively big amount of work — making big investments with a small amount of money. The rest of the money used to make the investment is borrowed, or investors are trading on margin.

In short: Leverage is about borrowing capital to make bigger bets in an effort to increase returns.

How Leverage Works

In leveraged investing, the leverage is debt that investors use as a part of their investing strategy. While it’s easy to think that all debt is bad, in fact it can actually be useful when folded into a specific investing tactic, although it also introduces additional risks and costs.

Leverage typically works like this: A person or company wants to make an outsized investment, but doesn’t have enough capital to do it. So, they use the capital they do have in conjunction with margin (borrowed money) to make a leveraged investment. If they’re successful, the return on their investment is far greater than it would’ve been had they only invested their own capital.

The risk, of course, is that those returns do not materialize, putting the investor in debt. Investors will also need to consider how their overall costs could increase, as they’ll likely pay interest on the money they borrow, too.

Example of Leverage

Here is an example of how leverage could be used:

Let’s say that you found a startup. To get the company off the ground, you take in $10 million from investors, but you want to expand operations fast — hire employees, ramp up research and development efforts, and build out a distribution network.

You can do that with the $10 million, but if you were to borrow another $10 million, you would be able to double your efforts. That would allow you to hire more employees, improve your products faster, and distribute them further and wider, though you’d need to pay interest on the loan, too, factoring into overall costs.

That $10 million you borrowed is allowing you to do more with less. Of course, you run the risk that the company won’t be able to sustain a quick growth pace, in which case you may not be able to pay back the loan, or end up paying additional costs for interest and fees. But if things do work out, you’d be able to grow faster and accrue more value than if you hadn’t taken on any additional debt.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros and Cons of Leverage

On the surface, leverage can sound like a powerful tool for investors — which it can be. But it’s a tool that can cut both ways: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

What’s important to remember is that there are both pros and cons to a tool like leverage.

Pros of Leverage	Cons of Leverage
Adds buying power	Increased risks and costs
Potential to earn greater returns	Leveraged losses are magnified
For investors, it’s generally easy to access	It can be more complex than meets the eye

Leverage vs Margin

Margin is a type of leverage that is specifically tied to use in the financial markets by investors. It is basically like a line of credit for a brokerage or investment account.

Here’s how margin works: An investor has a cash balance, which acts as collateral, and there are interest rates at play, like any other type of loan. With a margin account, investors can tradesome, but not all stocks or other assets on margin.

Using margin, an investor can effectively supercharge their potential gains or losses. It’s also important to note — and it’s worth repeating over and over — that using margin as an investor can increase overall costs and risks. Not every investor will be comfortable assuming those risks and costs (such as interest charges), so you’ll want to know what you’re doing before using margin.

Margin and leverage are related, and it’s easy to confuse the two. Even if you know what margin trading is and how margin accounts work, it’s important to make sure you know what the differences are. This chart should help.

Leverage vs Margin
Leverage	Margin
A loan from a bank for a specific purpose	A loan from a brokerage for investing in financial instruments
May involve a cash injection to be used for a specific purpose	No cash is exchanged; acts as a line of credit
Can be used by businesses or individuals; May take the form of a mortgage or to expand inventory	Can be used to create leverage and increase investment buying power

Types of Leverage

So far, we’ve mostly discussed leverage as it relates to the financial markets for investors. But there are other types of leverage, too.

Financial Leverage

Financial leverage is used by businesses and organizations as a way to raise money or access additional capital without having to issue additional shares or sell equity. For instance, if a company wants to expand operations, it can take on debt to finance that expansion.

The main ways that a company may do so is by either issuing bonds or by taking out loans. Much like in the leverage example above, this capital injection gives the company more spending power to do what it needs to do, with the expectation that the profits reaped will outweigh the costs of borrowing in the long run.

Operating Leverage

Operating leverage is an accounting measure used by businesses to get an idea of their fixed versus variable costs.

When discussing financial leverage, math needs to be done to figure out whether a company’s borrowing is profitable (called the debt-to-equity ratio). When calculating operating leverage, a company looks at its fixed costs as compared to variable costs to get a sense of how the costs of borrowing are affecting its profitability.

Leverage Investing

Leverage trading is the use of borrowed money to try and increase profits or returns. A company can use leverage investing by purchasing a new factory, allowing it to expand its ability to create products, and as such, increase profitability. An individual investor can borrow money to buy more stocks, increasing their potential returns.

It’s important to keep in mind, though, that leverage trading, or the use of borrowed money to invest, increases overall costs for investors, as they will need to pay interest on the money they borrow, and may be subject to other fees, too.

With that in mind, there are a few ways that leverage can be used in investing, either by individuals, or organizations.

Buying on Margin

Margin is a form of leverage, and trading on margin means that an investor is using money borrowed from their brokerage to execute a trade. In other words, an investor is borrowing money from their trading platform or brokerage — paying an applicable interest rate to do so, which can vary and should be considered as a part of overall trading costs — and making trades with it. It’s similar to using a credit card for investing, in some ways.

Given that margin concerns interest charges and additional costs, using it to trade or invest involves additional risks, particularly for inexperienced investors.

Leveraged ETFs

ETFs, or exchange-traded funds, can also have leverage baked into them. Leveraged ETFs are tradable funds that allow investors to potentially increase their returns by using borrowed money to invest in an underlying index, rather than a single company or stock. Leveraged ETFs utilize derivatives to increase potential returns for investors.

Using Borrowed Money to Invest

While many investors utilize margin, it’s also possible to borrow money from an outside source (not your broker or brokerage) to invest with. This may be appealing to some investors who don’t have high enough account balances to meet the thresholds some brokerages have in place to trade on margin. For example, a platform may require an investor to have a minimum balance of $25,000 in their account before they’ll offer the investor margin trading.

If an investor doesn’t have that much, looking for an outside loan — a personal loan, a home equity loan, etc.— to meet that threshold may be an appealing option.

But, as mentioned when discussing margin, borrowing money to invest can rope in additional risk, and investors will need to consider the additional costs associated with borrowing funds, such as applicable interest rates. So, before doing so, it may be a good idea to consult a financial professional.

Leverage in Personal Finance

The use of leverage also exists in personal finances — not merely in investing. People often leverage their money to make big purchases like cars or homes with auto loans and mortgages.

A mortgage is a fairly simple example of how an individual may use leverage. They’re using their own money for a down payment to buy a home, and then taking out a loan to pay for the rest. The assumption is that the home will accrue value over time, growing their investment.

Leverage in Professional Trading

Professional traders tend to be more aggressive in trying to boost returns, and as such, many consider leverage an incredibly important and potent tool. While the degree to which professional traders use leverage varies from market to market (the stock market versus the foreign exchange market, for example), in general most pro traders are well-versed in leveraging their trades.

This may allow them to significantly increase returns on a given trade. And professionals are given more leeway with margin than the average investor, so they can potentially borrow significantly more than the typical person to trade. Of course, they also have to stomach the risks of doing so, too — because while it may increase returns on a given trade, there is always the possibility that it will not.

Leveraged Products

There are numerous financial products and instruments that investors can use to gain greater exposure to the market, all without increasing their investments, like leveraged ETFs.

Volatility and Leverage Ratio

A leverage ratio measures a company’s debt situation, and gives a snapshot of how much debt a company currently has versus its cash flows. Companies can use leverage to increase their profitability by expanding operations, etc., but it’s a gamble because that profitability may not materialize as planned.

Knowing the leverage ratio helps company leaders understand just how much debt they’ve taken on, and can even help investors understand whether a company is a potentially risky investment given its debt obligations.

The leverage ratio formula is: total debt / total equity.

Volatility is another element in the mix, and it can be added into the equation to figure out just how volatile an investment may be. That’s important, given how leverage can significantly amplify risk.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Leverage can help investors, buyers, corporations and others do more with less cash on hand in their accounts at a given time. But there are some important considerations to keep in mind when it comes to leverage. In terms of leveraged investing, it has the potential to magnify gains — but also to magnify losses, and increase total costs.

Utilizing leverage and margin as a part of an investing or trading strategy has its pros and cons. But investors should give the risks some serious consideration before getting in over their heads. It may be a good idea to speak with a financial professional accordingly.

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

What is leverage in simple terms?

In simple terms, the concept of leverage means to do a lot with a little. As it relates to finance or investing, this can mean using a small amount of capital to make large or outsized trades or investments.

What is an example of leverage?

An example of leverage could be a mortgage, or home loan, in which a borrower makes a relatively small down payment and borrows money to purchase a home. They’re making a big financial move with a fraction of the funds necessary to facilitate the transaction, borrowing the remainder.

Why do people want leverage?

Leverage allows investors or traders to make bigger moves or take larger positions in the market with only a relatively small amount of capital. This could lead to larger returns — or larger losses.

Photo credit: iStock/StockRocket