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Sep

2025

Benefits, Drawbacks, and Options of a Self-Directed 401(k) Plan

By Brian O'Connell | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

What Is a Self-Directed 401(k) Account?
Who Is Eligible for a Self-Directed 401(k)?
How to Set Up a Self-Directed 401(k)
Pros and Cons of Self-Directed 401(k)s
How Much Money Can be Put in a Self-Directed IRA?
Common Self-Directed 401(k) Investments
Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules
FAQ

Self-directed 401(k) accounts aren’t as common as traditional 401(k) plans, but they can be of interest to DIY-minded investors.

Self-directed 401(k) plans — which may be employer-sponsored or available as a solo 401(k) for self-employed individuals — expand account holders’ investment choices, giving them more control over their own retirement plans. Instead of being limited to a packaged fund, an investor can choose specific stocks, bonds, mutual funds, and possibly even alternative investments, in which to invest their retirement money.

Key Points

• Eligibility for a self-directed 401(k) requires taxable income and employment by a company offering the plan or being self-employed with no employees except a spouse.

• Setting up a self-directed 401(k) involves establishing the account and then funding it by transferring funds from another 401(k) or IRA, using funds from a company received through profit-sharing, or making direct contributions.

• Benefits of a self-directed 401(k) include more investment options, tax deferral, potential employer matching, and potential diversification with alternative assets.

• Drawbacks include higher risks, especially with alternative assets; higher fees; and significant time spent managing the account.

• Prohibited investments are real estate with family ties, loans to family members, and transactions offering investment benefits beyond returns.

What Is a Self-Directed 401(k) Account?

The key promise of self-directed 401(k) plans is control. They allow retirement plan savers to basically act as managers for their own retirement funds.

A self-directed 401(k) plan offers expanded investment choices, including stocks, bonds, funds, and cash, and potentially alternative investments like real estate investment trusts (REITs) and commodities, if the plan allows for these alternative investments.

For a plan holder who believes they have the investment know-how to leverage better returns than a managed 401(k) or target-date fund, a self-directed 401(k) may be an appealing choice.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Who Is Eligible for a Self-Directed 401(k)?

As long as your employer offers a self-directed 401(k), and you have earned taxable income for the current calendar year, you can enroll.

Alternatively, if you are self-employed and own and run a small business alone, with no employees (aside from a spouse), and your business earns an income, you are also eligible. You can search for a financial institution that offers self-directed plans, which might include a solo 401(k).

This is one of the self-employed retirement options you may want to consider.

How to Set Up a Self-Directed 401(k)

Setting up a self-directed 401(k) plan can be fairly straightforward. Once a 401(k) or solo 401(k) account is established, individuals can fund it in the following ways:

• Plan transfer. Funds can be shifted from previous or existing 401(k) plans and individual retirement accounts (IRAs). However, Roth IRAs can’t be transferred.

• Profit sharing. An employee receiving funds from a company through profit sharing can use that money to open a self-directed 401(k) plan — up to 25% of the profit share amount.

• Direct plan contributions. Any income related to employment can be contributed to a self-directed 401(k) plan.

Recommended: How to Manage Your 401(k)

Pros and Cons of Self-Directed 401(k)s

Like most investment vehicles, self-managed 401(k) plans have their upsides and downsides.

Pros of Self-Directed 401(k) Plans

These attributes are some of the self-directed 401(k) plan advantages:

• More options. Self-directed 401(k) plans allow retirement savers to gain more control, flexibility, and expanded investment choices compared to traditional 401(k) plans.

• Tax deferral. Like regular 401(k) plans, self-directed 401(k) plan contributions and asset gains are tax-deferred.

• Employee matching. Self-directed 401(k) plans allow for employer matching contributions, potentially paving the way for more robust retirement plan growth.

• Plan diversity. Account holders can invest in assets not typically offered to 401(k) plan investors. This potentially includes alternative investments like REITs, precious metals like gold, silver and platinum, and private companies, depending on what the 401(k) plan allows, thus lending additional potential for diversity to self-directed 401(k) plans.

Cons of Self-Directed 401(k) Plans

These caveats and concerns are most often associated with self-directed 401(k) plans:

• Higher-risk investments. Historically, alternative investments come with more volatility — and hence more risk — than stocks and bonds.

• Diversification is on the investor. You’ll need to choose among stocks, bonds and funds to augment your self-directed 401(k) plan asset allocation.

• Higher fees. Typically, self-directed employer retirement plans cost employees more to manage, especially if an investor makes frequent trades.

• Larger time investment. Since self-directed 401(k) plans offer access to more investment platforms, savers will likely need to spend more time doing their due diligence to research, select, and manage their plan options, especially in the area of risk assessment.

How Much Money Can be Put in a Self-Directed IRA?

The amount an investor can contribute to a self-directed IRA is the same as the amount that can be contributed to a traditional IRA account. The annual contribution limit is $7,000 for tax year 2025. Those 50 and older can contribute an additional $1,000 to a self-directed IRA, for a total of $8,000 per year.

For a self-directed 401(k), the amount that can be contributed is the same as the contribution limits for a traditional 401(k). For 2025, the limit is $23,500. Those 50 and older can make an additional catch-up contribution of up to $7,500, for a total of up to $31,000. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), for a total of $34,750.

Recommended: Guide to Self-Directed IRAs

Common Self-Directed 401(k) Investments

The ability to choose from an expanded list of investment categories may be an intriguing benefit for a 401(k) plan holder who believes they have the investment know-how to leverage better returns from those investments.

However, the key is understanding what potential opportunities and what risks certain self-directed investment vehicles bring to the table. Here’s a closer look at two alternative investments that may be offered by some self-directed 401(k) plans.

Real Estate Investment Trusts (REITs)

Through a REIT, individuals with a self-directed 401(k) plan can potentially invest in residential or commercial properties with the goal of income generation — without having to actually buy property. A REIT is a company that owns and maintains different types of properties; investors can buy shares in the REIT.

Examples of properties that might be in a REIT include:

• Apartment buildings

• Hotels

• Office buildings

• Single-family homes

• Shopping malls or other retail centers

• Storage facilities and warehouses

• Health care facilities

REITs can be publicly traded or private. To invest in a publicly-traded REIT with a self-directed 401(k) plan, an investor would use their 401(k) funds to purchase shares in the REIT. The REIT would then pay out dividends on the income collected through rent, mortgages, and so on. REITs are required to distribute at least 90% of its taxable income to shareholders each year as dividends.

An investor might also choose to invest in REIT mutual funds or REIT exchange-traded funds (ETFs). These vehicles can provide ways to diversify holdings.

However, REITs come with risks. For example, they can be affected by fluctuations in the real estate market, such as falling property values or reduced occupancy demand. In addition, when interest rates rise, REIT prices may drop, which could lower the value of the investment. Individuals with a self-directed 401(k) should fully research and understand the risks of investing in a REIT.

Precious metals

Investing in certain precious metals like gold, silver, and platinum may be allowable with some self-directed 401(k) plans. However, these precious metals must meet specific requirements by the IRS — including purity standards and storage restrictions — to be held in a self-directed 401(k). Self-directed 401(k) plan participants may be able to invest in precious metals more easily via stocks or certain commodity funds — but again, only if their plan allows such investments.

It’s essential to remember that precious metal investing can be high risk, since gold, silver, and other metals can be highly volatile in value. Potential investors would need to be well prepared for that kind of risk.

Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules

While there are a number of different types of investment vehicles that are included in many self-directed 401(k) plans, regulatory rules do prohibit specific investment activities tied to several of those asset classes. The following investment strategies and associated transactions, for example, would not pass muster in self-directed 401(k) plans.

Real Estate With Family Ties

While investing in REITS may be allowed in some self-directed 401(k) plans, using real estate for extended personal gain is not allowed. For example, that could include buying an apartment and allowing a family member to live there, or purchasing a slice of a family business and holding it as a 401(k) plan asset. Neither of these scenarios is allowed under 401(k) plan regulatory rules.

Loans

Self-directed 401(k) plan consumers may not loan any plan money to family members or sign any loan guarantees on funds used in a self-directed 401(k) plan.

No Investment Benefit Beyond Asset Returns

Self-directed 401(k) plan holders cannot earn “extra” funds through transactions linked to plan assets. For example, a plan holder can invest in a REIT under 401(k) plan rules (as long as their plan allows for it) but they cannot charge any management fees nor receive any commissions from the sale of that property.

Basically, a self-directed 401(k) plan participant cannot invest in any asset category that leads to that plan participant garnering a financial benefit that goes beyond the investment appreciation of that asset.

The Takeaway

While self-directed 401(k) plans can add value to a retirement fund, self-directed retirement planning is not for everyone.

This type of account typically requires more hands-on involvement from the plan holder than a traditional 401(k) fund does, and it may incur more fees. Additionally, investing in alternative investments comes with higher risk, which may not be suitable for some investors. Another type of retirement account may be a better option in this case.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

FAQ

What is the difference between an individual 401(k) and a self-directed 401(k)?

A self-directed 401(k) gives account holders more investment choices, as well as more control over their own retirement plans. Instead of being limited to a packaged fund as they would be with an individual 401(k), an investor can choose specific stocks, bonds, mutual funds, and potentially even alternative investments (depending on what the plan allows), in which to invest their retirement money.

Can I roll my traditional 401(k) into a self-directed 401(k)?

Yes. You can shift funds from a previous or existing 401(k) plan or individual retirement account (IRA) into a self-directed 401(k). The exception to this is a Roth IRA, which can’t be transferred.

How is a self-directed 401(k) taxed?

Like regular 401(k) plans, all self-directed 401(k) plan contributions and asset gains are tax-deferred until withdrawn. With self-directed 401(k)s, there is a 10% tax penalty for early withdrawals (before age 59 ½), the same as with traditional 401(k)s.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q325-110

Sep

2025

Investing in Growth Funds

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

Table of Contents

What Is Growth Investing?
Growth Fund Performance
Examples of Growth Stocks
Benefits of Investing in Growth Mutual Funds
Downside of Growth Mutual Funds
Evaluating a Company’s Potential for Growth
Buying Growth Mutual Funds
Investing for Growth or Value?
Determining When to Invest in Growth Mutual Funds
FAQ

A growth fund is a type of mutual fund or exchange-traded fund (ETF) that’s typically invested in growth stocks, i.e., companies that aim to deliver substantial positive cashflow and better-than-average returns. Growth funds are focused on capital appreciation over time.

Growth funds primarily include shares of growth stocks, but can also include bonds or other investments designed specifically with higher returns in mind. Individual growth funds typically focus on small- , mid- , or large-cap stocks (although some might offer a mix).

Unlike some value funds, growth funds rarely pay dividends. Instead, investors make money on the appreciation of the underlying stocks. Since growth mutual funds are considered somewhat riskier investments — with a higher risk of loss along with a potential for bigger gains — holding these funds for the longer term may help mitigate the short-term impact of price volatility.

Key Points

• In investing, a growth strategy is a more aggressive approach that’s focused on generating returns.

• Growth funds are primarily invested in growth stocks: shares of companies that aim to deliver returns.

• Growth funds may include stocks as well as bonds or other securities.

• A growth strategy can be risky, as it includes the potential for losses.

• Growth funds, like the growth stocks in their portfolios, generally don’t pay dividends, but reinvest earnings to fuel further growth.

What Is Growth Investing?

Growth investing is a strategy that focuses on increasing company revenue or investor returns. For this reason, growth investors may invest in younger or smaller companies, when they invest online or through a traditional brokerage, which are said to be in a growth phase, and whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.

Growth Companies, Growth Strategies

Growth stocks aren’t always new companies, though. Larger, more established companies can also fall into this category, assuming they are poised for expansion. Big companies could be in a growth phase due any number of factors:

• Technological advances

• Shift in strategy

• Movement into new markets

• Acquisitions

How much growth can you expect to get from growth stock mutual funds? As with any mutual fund, the performance of these funds depends on their underlying assets and, in the case of actively managed funds, their portfolio managers’ strategies.

There are also growth index funds, which are passively managed. A growth index fund is a growth stock mutual fund that tracks the performance of a particular stock index that’s focused on growth (e.g., the CRSP Large Growth Index or CRSP Small Cap Growth Index).

Growth Fund Performance

To give you an example of how growth funds compare to the domestic equity market as a whole, the U.S. stock market had an average return of 11.6% in the last decade, compounded annually, as of Aug. 1, 2025, according to Yahoo Finance.

For context, here is the performance of five growth mutual funds and ETFs over the last 10 years, data from Morningstar, as of June 30, 2025.

Fund Name	Total Net Assets	10-year avg. annual return
Champlain Mid Cap Fund (CIPMX)	$3.8 billion	11.11%
Champlain Small Company Fund (CIPSX)	$1.7 billion	9.96%
Fidelity Series Large Cap Growth (FHOFX)	$2.1 billion	15.94%*
Loomis Sayles Growth Fund (LSGRX)	$17.7 billion	17.86%
Morgan Stanley Institutional Fund, Inc. Growth Portfolio (MGHRX)	$4.6 billion	5.74%*

Source: Morningstar, as of June 30, 2025
*5-year returns used; inception August 2018 for FHOFX, June 2018 for MGHRX.

Remember that growth investing can be volatile since companies typically take some risks in order to expand. Also, some growth companies can get a lot of media or investor attention, which can contribute to price swings as investors buy and sell shares with the hope of seeing a profit.

Examples of Growth Stocks

Market capitalization — which indicates the number of outstanding shares a company has multiplied by its price per share — is not a specific hallmark or characteristic of growth stocks. Growth stocks can be large-cap corporations, mid-cap, or smaller companies. That said, most growth funds generally tilt toward larger companies.

Large-cap companies can scale their manufacturing to produce more products at cheaper prices, which increases their potential. Plus, big companies tend to reinvest the money they make into research and development, acquisitions, or expansion.

Information technology companies are often the largest holdings in U.S. growth mutual funds, but these funds may also hold healthcare and consumer discretionary stocks as well.

Smaller companies also have a lot of growth potential, as noted above — and some small-cap companies may be in the initial startup phase, which can sometimes generate outsize growth. And many mid-cap companies have been around longer and may have the ability to adapt to new market needs.

Benefits of Investing in Growth Mutual Funds

There are a few good reasons to consider growth stock mutual funds, and portfolio diversification is a consideration here.

It would be expensive for most individual investors when trading stocks to achieve the level of diversification offered by a pooled investment like a growth mutual fund. Investing in a single fund gives investors exposure to a wide range of stocks in different sectors.

Growth funds may also have long-term potential. For instance, growth stocks are more likely to see returns during an economic boom cycle, when many companies are growing and thriving. But shares can also be volatile, which is one of the risks of the sector.

While investors may not be able to count on dividend income from a growth mutual fund, they may still be able to sell the fund for more than what they paid for it, although there are no guarantees.

Downside of Growth Mutual Funds

Like any other investment, there are potential drawbacks to keep in mind with growth stocks and their growth fund counterparts.

While growth stocks can potentially increase in value more quickly than other stocks, this also makes them a potentially risky and more volatile investment. A typical growth stock mutual fund might return 18.0% one year and –6.0% the next. That kind of volatility isn’t for everyone.

In order for a growth stock to keep growing, the company must continue to earn money. This is challenging for any company to maintain over a long period of time. If there’s a recession, if a company has an unforeseen loss, or can’t continue to grow, the value of the stock may go down.

To help manage this risk, investors may choose to hold growth stocks and growth mutual funds for the five to 10 years, so that they can ride out market fluctuations and potentially be more likely to make a profit.

It’s also important to keep in mind that some growth stocks could become overvalued by the market, which might impact a growth fund’s performance. In this scenario, an investor might buy shares in a growth fund, hoping for solid returns. But if one or more of the underlying companies in those funds ends up being overvalued, the stock’s performance might fall below investor expectations.

Evaluating a Company’s Potential for Growth

Assessing a company’s potential for growth, either in the near or long term, is not an exact science. But it’s important to consider how likely a company is to grow when determining whether it’s a good fit for a growth portfolio. This typically involves looking at several key metrics, including:

• Return on Equity (ROE). Return on equity is used to measure company performance. It’s calculated by dividing net income by shareholder equity over a set time period.

• Earnings Per Share (EPS). Earnings per share represents a company’s total profit divided by its total number of outstanding shares. EPS is used to measure a company’s profitability.

• Price to Earnings to Growth (PEG). The price to earnings to growth ratio represents the price to earnings (P/E) ratio of a stock divided by the growth rate of its earnings over a set time period. Growth funds tend to have a higher P/E ratio (price to earnings ratio), which is the cost of a company’s stock relative to its earnings-per-share (EPS) than other funds. This can make them more expensive, but their potential for growth might make the extra cost worth it.

When using these and other metrics to measure a company’s growth potential, it’s important to understand how to interpret them. For example, a company that has a higher earnings per share is generally viewed as being more profitable. Likewise, a high price to earnings ratio is considered to be an indicator of continued growth.

But investors should also consider how sustainable the outlook for profitability and growth truly is, given the context of a company’s revenue, debt, and cash flows.

Buying Growth Mutual Funds

When choosing which growth stocks or growth funds to invest in, there are several factors investors may choose to consider. These include:

• Historical performance

• Stocks and other securities held in the fund

• Fund fees (e.g., the expense ratio)

• Potential earnings

Growth funds can often — but not always — be identified by the word growth in their name. Some investors might choose to put their money in blended funds, which combine growth stocks with less risky holdings. These funds allow investors to benefit from some of the upsides of growth funds without quite as much risk.

Certain growth funds are exchange-traded funds, or ETFs. Like any ETF, these funds can be traded during the day like stocks.

It’s important for investors to understand the risks before investing in any stock or fund, and to build a diversified portfolio of assets in order to help mitigate risk. With a diversified portfolio, investors hold both riskier assets and less volatile assets, in an effort to reap potential benefits of growth without losing too much along the way.

It’s also vital to remember that past performance is not a guarantee of how well a stock or growth fund will perform in the future.

Recommended: Stock Market Basics

Investing for Growth or Value?

Growth investing and value investing are couched as different styles of investing, yet they share a similar profit-driven focus — just a different means of getting there. With growth investing, the overarching goal is to invest in companies that have solid potential for growth. With value investing, the goal instead is to find companies that have been undervalued by the market — and hopefully see them increase in value.

A value investor may seek out companies that they believe are bargains based on current market price. They then invest in these companies, either by purchasing individual shares or through value mutual funds, and hold onto those investments over time. The end goal is to eventually sell their shares for a profit down the line.

In addition to eventual capital appreciation, value stocks can also pay dividends to investors. Value stocks are typically more likely to be established companies rather than newer ones. The most important thing to know with value investing vs. growth investing is how to avoid a value trap. This is a company that appears to be undervalued, but actually has a correct valuation. In that case, an investor might buy in, expecting the stock’s price to rise over time, only to be disappointed by a price that stays the same or worse, declines.

Determining When to Invest in Growth Mutual Funds

Dollar cost averaging is a way to invest small amounts of money consistently over time, rather than attempting to time the market, which helps investors to limit their risk exposure. However, if there is a stock market correction, it can be a good time to pick up some extra assets while they’re at particularly low prices.

Growth stocks tend to do well during bull markets, so while they may not see significant gains during a recession, they can still be an option to consider for long-term investments to pick up before the next economic boom.

The Takeaway

Growth stocks have a primary goal of capital appreciation. These stocks are expected to grow more quickly than other stocks in the market, and because of this, growth mutual funds are considered riskier investments than other mutual funds with a high risk of loss along with a higher potential for gain.

Growth funds holdings tend to have a higher P/E ratio (price to earnings ratio), which can make them more expensive investments, but their rapid growth may make the extra cost worth it.

These types of funds are more likely to see returns during an economic boom, vs during a recession. During a recession or economic downturn, companies may not have the cash or earnings to be able to invest in growth, and the value of the stocks the fund could go down.

Investors who know the basics of growth mutual funds may be interested in adding some of these assets, or other types of mutual funds and ETFs, to their investment portfolio.

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).

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

FAQ

Do growth funds pay dividends?

No, typically growth funds do not pay dividends because the underlying stocks held in the fund, which are growth stocks, reinvest profits into the company to fuel growth.

How risky is a growth fund?

Growth funds, like growth stocks, are generally considered higher risk owing to the volatility of some of the stocks they hold. Some investors may appreciate the potential for bigger gains, while others may not tolerate the risk exposure.

Which is better, investing for growth or income?

Choosing between an income strategy or a growth strategy will likely depend on your investment time horizon, as well as your goals. Investors in retirement may prefer investing with income in mind; younger investors with more years to ride out any volatility may want to invest in growth funds.

About the author

Rebecca Lake

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

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q325-087

Sep

2025

What Are Stock Delistings and Why Do They Occur?

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

Table of Contents

How Stock Listings Work
What Does Delisting a Stock Mean?
What Happens If a Stock Is Delisted?
What to Do If a Stock You Own Is Delisted
FAQ

When a stock is delisted, that means it’s been removed from a public stock exchange. All publicly traded stocks are listed on an exchange. In the U.S., that typically means the New York Stock Exchange (NYSE) or the Nasdaq.

There are different reasons for delisting stock, it can occur voluntarily, such as when a company chooses to go private, or involuntarily, if it fails to meet the requirements of the stock exchange.

Owning a delisted stock doesn’t mean you can no longer trade it, but it does change how trades take place. If you own a delisted stock, it’s important to understand what it may mean for your portfolio.

Key Points

• Stocks can be removed from major exchanges through delisting, either voluntarily or involuntarily.

• Common reasons for delisting include failing to meet listing requirements, going private, or financial distress.

• Delisting impacts investors by making shares harder to trade and potentially losing value.

• After delisting, stocks move to over-the-counter (OTC) markets, reducing transparency and accessibility.

• Investors should assess the reason for delisting and may choose to sell shares if it signals financial issues.

How Stock Listings Work

Before diving into stock delisting, it’s helpful to know more about how stocks get listed in the first place. Stock exchanges can either be physical or digital locations in which investors buy and sell stocks and other securities. The NYSE is an example of a physical exchange, while the Nasdaq is an electronic stock exchange.

To get listed on any stock exchange, companies must meet certain requirements. For example, Nasdaq-listed companies must meet specific listing guidelines relating to:

• Pre-tax earnings

• Cash flows

• Market capitalization

• Revenue

• Total assets

• Stockholder equity

• Minimum bid price

Companies must also pay a fee to be listed on the exchange. The NYSE has its own requirements that companies must meet to be listed.

Once a stock is listed, it can be traded by investors. But being listed on an exchange doesn’t guarantee the stock will remain there permanently. Stocks get added to and removed from exchanges fairly regularly.

What Does Delisting a Stock Mean?

When a stock is delisted, either the company itself or the exchange decides to remove the stock from the exchange.

Exchange-Initiated Stock Delisting

When an exchange delists a stock, it’s typically because it no longer meets the minimum requirements for listing or the stock has failed to meet some regulatory requirement. Using Nasdaq-listed stocks as an example, a delisting can happen if a company’s pre-tax earnings, market capitalization, or minimum share price fall below the thresholds required by the exchange.

Exchanges set listing requirements to try and ensure that only high-quality companies are available to trade. Without stock listing requirements, it would be easier for financially unstable companies to find their way into the market. This could pose an investment risk to individual investors and the market as a whole.

In delisting stocks that don’t meet the basic requirements, exchanges can minimize that risk. When and if a company addresses the areas where it falls short, it can apply for relisting. Assuming it meets all the necessary requirements, it can once again trade on the exchange.

Exchanges typically give companies opportunities to rectify the situation before delisting stocks. For example, if a company is trading under the minimum bid price requirement, the exchange can send notice that this requirement isn’t being met and specify a deadline for improvement. That can help companies that experience temporary price dips only to have share prices rebound relatively quickly.

Company-Initiated Stock Delistings

A delisted stock can also reflect a decision on the part of the listed company. There are different reasons a company voluntarily delists itself. Scenarios include:

• A move from public to private ownership

• Merger with or acquisition by another company

• Bankruptcy filing

• Ceased operations

In some cases, a company may ask to be delisted as a preemptive measure if it’s aware that it’s in danger of being delisted by the exchange. For example, if the latest quarterly earnings report shows a steep decline in market capitalization below the minimum threshold, the company may move ahead with voluntary delisting.

What Happens If a Stock Is Delisted?

Once a stock has been delisted from its exchange, either voluntarily or involuntarily, it can still be traded. But trading activity now happens over-the-counter (OTC) versus through an exchange.

An over-the-counter trade is any trade that doesn’t take place on a stock exchange. Investors can trade both listed or delisted stock shares over-the-counter through alternative trading networks of market makers. The OTC Markets Group and the Financial Industry Regulation Authority (FINRA) are two groups that manage OTC trading activity.

Unless the company that issued a now-delisted stock cancels its shares for any reason, your investment doesn’t disappear. If you owned 500 shares of ABC company before it was delisted, for example, you’d still own 500 shares afterward. You could continue trading those shares, though you’d do so through an over-the-counter network.

What can change, however, is the value of those shares after the delisting. Again, this can depend on whether the exchange or the company initiated a delisting, and the reasoning behind the decision.

For example, if a stock is being delisted because the company is filing for bankruptcy its share price could plummet. That means when it’s time to sell them, you may end up doing so at a loss.

Even if a stock’s value doesn’t take a nosedive after delisting, it can still be a sign of financial trouble at the company. If you own delisted dividend-paying stocks, for instance, dividend payments may shrink or dry up altogether if the company begins making cutbacks to preserve capital or reduce expenses.

What to Do If a Stock You Own Is Delisted

If you own shares in a company that delists its stock, it’s important to consider how to manage that in your portfolio. Specifically, that means thinking about whether you want to hold on to your shares or sell them.

It helps to look at the bigger picture of why the reason for the delisting and what it might say about the company. If the company pulled its stock because a bankruptcy filing is in the works, then selling sooner rather than later might make sense to avoid a sharp drop in value.

Also, consider the ease with which you can later sell delisted stock if you decide to keep them. Some online brokerages allow you to trade over-the-counter but not all of them do. If you prefer to keep things as simple as possible when making trades, you may prefer to unload delisted stocks so you no longer have to deal with them.

Recommended: How to Open a New Brokerage Account

The Takeaway

When a stock becomes delisted, it’s removed from a stock exchange, either because it no longer met the requirements of the exchange, or because the company chose to delist for financial reasons. You can still trade a company after it’s delisted, but transactions occur over-the counter, rather than on an exchange.

Knowing about delisted stocks and companies can be helpful for investors of all types. Broadening your knowledge about the markets is almost never a bad idea.

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

Why would a stock get delisted?

A stock can be delisted and removed from a stock exchange for a number of reasons. The delisting may be voluntary, meaning the company chooses to be delisted because it’s going private or being bought or merged with another company, or it is planning to declare bankruptcy or cease operations.

An involuntary listing, on the other hand, is when a stock exchange delists a stock because it no longer meets certain requirements by the exchange. For example, a stock could be delisted by an exchange if it no longer fulfills requirements for its share price, pre-tax earnings, or market capitalization.

Is delisting a stock good or bad?

In general, holding delisted stock is less than desirable. Once a stock is delisted from a major exchange, it becomes harder to buy and sell. In addition, the price of the shares may fall, or the delisting could be a signal that the company is in financial trouble.

What happens to my stock if a company delists?

Once a company is delisted, you still own your shares of the stock, but it becomes more difficult to buy and sell them. That’s because the stock is no longer on a major stock exchange but instead it’s on an over-the-counter (OTC) market, which is less accessible to investors and has less regulation and transparency. The value of your shares may also drop.

However, if the company delisted voluntarily because it is going private or being merged with another company, you might receive cash for your shares or shares in the purchasing company. Understanding the reason for the delisting and how it may affect your shares can be helpful.

About the author

Rebecca Lake

Photo credit: iStock/wacomka

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

SOIN-Q325-074

Sep

2025

What Is an IPO Roadshow?

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

Table of Contents

What Is a Roadshow?
How Roadshows Work
New Digital Roadshows
Importance of Roadshows
FAQ

Before a company can sell its shares on an exchange, it first needs to go through the Initial Public Offering (IPO) process. One of the most critical steps in this process is the IPO roadshow, in which the company pitches itself to potential investors.

A roadshow presentation can take place in-person, with meetings in cities across the country, or the company can offer an online event instead. Either way, the goal is the same: to generate interest in the company that will encourage investors to buy in.

Key Points

• An IPO roadshow is a series of meetings or presentations in which key members of a private company pitch the initial public offering to prospective institutional investors.

• Digital roadshows have become increasingly popular and offer an advantage of increased efficiency compared to traditional in-person roadshows.

• The purpose of an IPO roadshow is to generate interest in a company among prospective investors in order to raise capital.

• Virtual IPO roadshow presentations have the potential to reach a broader audience, rather than being limited to a handful of cities.

• Buying IPO stock can help diversify an investment portfolio, but is typically high risk and requires due diligence.

What Is a Roadshow?

In general, a roadshow is a series of meetings or presentations in which key members of a private company, usually executives, pitch the initial public offering, or IPO, to prospective investors. Essentially, the company is taking its branding message on the road to meet with investors in different cities, hence the name.

The IPO roadshow presentation is an important part of the IPO process in which a company sells new shares to the public for the first time. Whether a company’s IPO succeeds or not can hinge on interest generated among investors before the stock makes its debut on an exchange.

There are also some cases where company executives will embark on a roadshow to meet with investors to talk about their company, even if they’re not planning an IPO.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

How Roadshows Work

Typically, the roadshow is the third step in the IPO process, following the selection of an underwriter to oversee the process and the completion of due diligence. At this point, the Securities and Exchange Commission (SEC) reviews all of the documents submitted in connection with the IPO, while the company and the underwriting team get ready for the roadshow.

The underwriters and executives taking part in the IPO roadshow work together to decide which cities to visit, which investors to target, and which information to include in the roadshow presentation.

A typical IPO roadshow presentation highlights the most important information the company wants investors to know, including:

• The company’s history and its plans regarding the IPO

• Details about the top executives

• The current vision and mission statement

• Financial performance and earnings history

• Future sales projections and anticipated growth

• IPO goals

A roadshow IPO presentation may include digital media, such as videos or a slideshow. Investors have a chance to ask questions during a Q&A session following the presentation.

The roadshow tour for an IPO can last anywhere from days to weeks, depending on how many stops the company makes along the way.

New Digital Roadshows

Virtual roadshows have become an increasingly popular alternative to the traditional IPO roadshow. The Covid-19 pandemic forced companies to rethink the way they meet with investors, resulting in a growing number of roadshows taking place online only.

Digital roadshows mean companies forgo a chance to meet with prospective investors face-to-face, but they offer an advantage in terms of increased efficiency. Company executives and underwriters save money and time, since they’re not traveling. Virtual IPO roadshow presentations also have the potential to reach a broader audience about the investment opportunity, rather than being limited to just a handful of cities.

If a company schedules multiple presentations in a single day, using a virtual format, they can complete the roadshow and move through the IPO process more quickly. This could make it easier to determine the price of an IPO if there’s less opportunity for pricing to be affected by volatility. Pricing the IPO typically happens at the conclusion of the roadshow.

Importance of Roadshows

The IPO roadshow presentation is an opportunity for a company to convince investors that buying stock in their company is a good investment opportunity. The main purpose of an IPO is generally to raise capital and companies can’t do that without interest from investors.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence. While individual investors aren’t included in the IPO roadshow process, they can follow the coverage, to understand new details that might emerge about the company.

Pros and Cons of a Roadshow

If the company goes public and no one buys its shares, then the IPO ends up being a flop, which can affect the company’s success in the near and long term. If the company experiences an IPO pop, in which its price goes much higher than its initial offering price, it could be a sign that underwriters mispriced the stock.

A roadshow is also important for helping determine how to price the company’s stock when the IPO launches. If the roadshow ends up being a smashing success, for example, that can cause the underwriters to adjust their expectations for the stock’s IPO price.

On the other hand, if the roadshow doesn’t seem to be generating much buzz around the company at all, that could cause the price to be adjusted downward.

In a worst-case scenario, the company may decide to pull the plug on the IPO altogether or to go a different route, such as a private IPO placement.

The Takeaway

The IPO roadshow presents an opportunity for a new company to convince investors to invest in their organization. The main purpose of an IPO is to raise capital and companies can’t do that without interest from investors.

While individual investors typically don’t have access to roadshows, eligible investors may still participate in IPO trading. Participating in IPO investing may provide an option for diversifying an investment portfolio, and may present growth opportunities — but IPO shares are typically high risk. It’s vital to do thorough research about any IPO opportunity.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

FAQ

What is the purpose of a roadshow?

The purpose of an IPO roadshow is to generate interest in a company among prospective investors. The company executives and underwriters can meet with investors in-person or virtually to share details about the IPO, the company’s financials, and its goals.

How long after the roadshow is the IPO?

The IPO can take place as little as two weeks after the roadshow is completed. The actual timing depends on a number of factors, including whether the underwriters determine that a price adjustment is needed or if any snags come up involving the filing of key documents.

Are IPO roadshows public?

The IPO roadshow process typically focuses on institutional investors, rather than retail investors. So the roadshow presentations have traditionally been private affairs. But with more companies opting to host virtual roadshows, there may be potential at some point for the general public to be able to view some IPO presentations online.

About the author

Rebecca Lake

Photo credit: iStock/FreshSplash

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q325-078

Sep

2025

Understanding Low-Float Stocks

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

Table of Contents

Stock Float: Quick Recap
What Are Low-Float Stocks?
Understanding Shares Outstanding
Floating Stock, Example Calculation
Importance of Low-Float Stocks
Benefits of Trading Low-Float Stocks
6 Reasons for Low-Floating Shares
Evaluating Low-Float Stocks
How to Trade Low-Float Stocks
The Takeaway
FAQ

A company’s float, or floating shares, are those available for public trading after subtracting closely held stock and restricted shares from all outstanding shares. Low-float stocks are companies with a relatively small number of shares available for public trading. It doesn’t mean the company has very few shares in total.

The percentage of floating stock can help investors assess a stock’s liquidity. Float can also be an indicator of volatility.

Low-float stocks are considered more volatile, and typically have higher bid/ask spreads (a reason some day traders look to trade low-float stocks). But a company’s float can change owing to various conditions.

Key Points

• Low-float stocks are companies with a smaller percentage of outstanding share available for public trading.

• The float of a stock is calculated by subtracting closely held and restricted shares from the total number of outstanding shares, to get the percentage available for public trading.

• Various factors contribute to a company’s float, including control by insiders, family ownership, stock buybacks, and stock-based compensation.

• Day traders often favor low-float stocks due to their potential for significant short-term gains, but the high volatility also presents substantial risks that require careful evaluation.

• Monitoring news events and technical indicators is essential for trading low-float stocks, as these factors can lead to dramatic price movements and influence trading strategies.

Stock Float: Quick Recap

The float of a stock indicates the number of shares of company stock available for public trading. The measure doesn’t include closely held shares, those owned by controlling investors, employees, institutions, or company owners.

A company’s float changes frequently. Calculating floating stock requires looking at a company’s balance sheet and taking the total number of shares of a company and subtracting any restricted and closely held shares.

Some stock indexes, such as the S&P 500, use the percentage of floating stock as the basis for figuring out the free-floating market cap of a company. This is different from standard market capitalization, which simply refers to the number of outstanding shares multiplied by the share price.

Recommended: Investing 101 Guide

What Are Low-Float Stocks?

Some larger corporations have very high floats, in the billions, and investors typically consider a float of 10 to 20 million shares as a low-float. But there are companies with floats of less than one million, and you can find even lower-float stocks trading on over-the-counter exchanges (OTC).

Companies with a low-float frequently have a large portion of their equity held by controlling investors such as directors and employees, which leaves only a small percentage of the stock available for public trading. That limited supply can cause dramatic price swings if demand changes quickly.

Because low-float stocks have fewer shares available, investors interested in trading stocks like these may have difficulty finding a buyer or seller for them. This may make the stocks more volatile, which appeals to day traders. The bid-ask spread of low-float stocks tends to be higher as well.

Recommended: Stock Market Basics

Understanding Shares Outstanding

Another stock market term that helps explain low-float stocks is shares outstanding. Shares outstanding refers to the total number of shares issued by a company, including those that can’t be traded (e.g., closely held and restricted shares).

Insider shares are considered closely held, because they’re owned by company employees, officers, and managers, as well as institutional investors (and others who have a controlling stake in the company).

When those shares are subtracted from the total outstanding, that’s the amount available for public trade. This is known as the float percentage. Companies might have numerous shares outstanding, but only a certain percentage of floating stock that can be publicly traded.

The amount of floating stock typically changes over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings. If a stock goes through a stock split or reverse split, this will also increase or decrease floating shares.

Floating Stock, Example Calculation

If a trader thinking of buying stock online looks at a company’s balance sheet, they can see how many outstanding shares the company has under the heading “Capital Stock.”

Looking at fictional Company A, the company’s balance sheet shows outstanding shares and floating stock shares:

• 50 million shares outstanding

• 45 million float shares

This is a high-float stock, with 90% of the stock available for trade. By contrast, Company B has:

• 2 million shares outstanding

• 475,000 float shares

This is a 23.75% float, and could serve as a signal for day traders to look at other factors to determine whether they want to invest in the stock.

Importance of Low-Float Stocks

If you’re interested in investing in a particular company, it’s important to understand its stock float, in order to gauge potential risk factors (like volatility, liquidity, and the size of the bid-ask spread).

The size of a stock float can change over time, which would affect the stock’s liquidity and volatility. Stock buybacks, secondary share offerings, insider buying or selling shares, and stock splits (or reverse splits) can cause the number of shares outstanding to change, and thus the float.

Benefits of Trading Low-Float Stocks

Essentially, low-float stocks primarily benefit day traders who are willing to take the risk of making short-term trades with the hope of a quick profit.

By their nature, low-float stocks are volatile. There are relatively few low-float stocks in the marketplace, and their prices tend to go up and down easily and quickly, due to the smaller number of tradable shares. Moreover, every trade of a low-float stock issue can have a larger impact on the value of the stock than it would on a security with a higher float.

For example, when good news hits a security with a limited supply, it doesn’t take much for it to have a huge impact on the share price. A low-float stock can see big gains when demand skyrockets. Conversely, if bad news comes to the same security, its price can drop rapidly. Nonetheless, day traders willing to assume the risk may want to trade low-float stocks

6 Reasons for Low-Floating Shares

Low-float stocks tend to have higher spreads and more volatility than a comparable higher-float stock, where many shares are available to trade. By contrast, investors may find it hard to enter or exit positions in stocks that have a low float. What are some specific instances that could account for low-floating shares?

1. Special Purpose Acquisition Companies (SPACs)

Certain shares may be trading at a low float because the company that’s issuing the stock is part of a special purpose acquisition company (SPAC). A SPAC is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO).

Typically, experienced business executives in the same industry as the SPAC’s target acquisition become the founders of a SPAC. A SPAC could take as long as a number of years to complete. And, even when the new company does go public, there may be fewer shares available for public purchase because they’re held by founders of the SPAC or other officers and insiders close to the deal.

2. The Company Is Family Operated

Another reason for low-float shares could be that the company is family owned. In these cases, a family likely would own a significant share of the company’s shares and would influence important decisions, like electing a chairman and CEO. In particular, if a family-operated company is small to midsize, there may be few shares left for the public to buy.

In fact, family-owned or operated businesses abound in the market — including well-known names like BMW, Samsung, and Wal-Mart Stores. About 35% of Fortune 500 companies are family controlled.

3. Stock Buybacks

If a company buys back some of its shares, that may affect its float by reducing the number of shares available for trading; there’s even a name for it: float shrink.

Regular share buybacks, along with dividend payments, are two ways that a company may reward shareholders. Another reason for a share buyback could be for a company to gain better control of its strategic initiatives without needing to consult its shareholders.

4. Company Has Donated Shares to Its Charitable Foundation

If a company founder has donated a large percentage of its shares to an associated charitable foundation, this could result in a lower float, if the foundation has held onto the shares which are then excluded from the overall float count.

5. Initial Public Offerings (IPOs)

In another scenario, a company might be involved in an initial public offering (IPO), in which its shares are considered privately held until the IPO is complete. Once the new shares are made publicly available for trade, a stock could be considered low float because a high percentage of shares are still restricted for a period of time.

6. Stock-Based Compensation

Some companies have initiatives that reward their employees with company stock; either as part of an incentive program or combined with their regular compensation.

A company also could have an equity compensation program in place as a way of rewarding employees, executives, and directors of a company with equity in the business. Depending on the company, these restricted shares could impact float if employees were to redeem a large number of stock options or restricted stock units.

Evaluating Low-Float Stocks

Not every low-float stock represents a good buy, but it is a popular strategy for day traders. To evaluate a low-float stock, day traders often look at several other factors.

High Relative Volume

The relative volume shows a stock’s current volume in comparison to earlier periods in a company’s history. This is important to investors because it can affect a stock’s liquidity. If a stock has low liquidity, traders can potentially get stuck with shares they can’t sell.

They may also find themselves unable to take advantage of news events that impact trading. If a stock’s price changes, but there isn’t a lot of trading volume, it may not be a good pick.

News Events

Positive or negative news about a company frequently makes a low-float stock increase or decrease in a short amount of time.

Day traders keep a close eye on the stock market and corporate news to see which stocks likely would make moves. A news event can cause a low-float stock to move anywhere from 50% to 200% in a single day, as they are in low supply.

Float Percentage

This is the percentage of the total shares of stock available for trading. Each trader has their preferences, but most look for a percentage between 10% and 25%.

How to Trade Low-Float Stocks

When trading a low-float stock, a trader might buy and sell the same stock multiple times in a single day. Then, move on to a different low-float stock the next day in an extreme form of market timing.

Many traders will plan out their profit targets and support and resistance ahead of time, and use stop loss orders to reduce risk. As with any trade, traders can look at technical indicators like candlestick charts and moving averages to see whether a stock looks bullish or bearish.

A good strategy pays attention to technical analysis and rather than simply buying or selling based on rumors or news.

Finding Low-Float Stocks

Finding and evaluating stocks to trade requires some knowledge and experience. Several platforms offer the ability to trade low-float stocks. Some of these platforms allow traders to filter by criteria such as volume and float to find the best opportunities. Traders can look for stocks with a float of less than 50 million and a relatively high volume.

Penny stocks less than $5 are very popular with day traders. Traders can also look to watchlists for ideas about which low-float stocks to trade. There are a number of stock-screening tools investors can use to find low-float stocks.

Some Risks to Know

Every investment comes with risks, but low-float stocks present some particular challenges. Day trading is inherently very risky and can result in significant losses (as well as gains). So, other types of investments are often a better fit for those with a low appetite for risk.

Low-float stocks can have high volatility; their price can change within seconds or minutes. If an investor isn’t careful, knowledgeable, or always on top of it, this volatility could wipe out a large portion of their portfolio. Low-float stocks could also present substantial profit opportunities; traders might see gains of 50% to 200% in a single day.

Looking at both the news and technical indicators is crucial for trading success. Trading low-float stocks requires a daily look at market news, as the stocks that look like a promising trade one day may not be ideal the next.

Test your understanding of what you just read.

The Takeaway

The term “low-float,” as it pertains to stocks, refers to the relatively smaller number of shares available to trade in the public market after the appropriate number of shares are allocated to founders, officers of the company, and other inside investors.

It’s important for investors to be aware of the amount of a company’s low-floating stock, as it can reflect the stock’s liquidity. If a stock has relatively few available issues, it might be harder for traders to sell it.

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

FAQ

Is a low-float stock good?

When a company’s stock is considered low float, there are fewer shares available for public trading. That can increase volatility for some investors, while others (like day traders) may be able to leverage changes in the share price.

How important is a stock’s float?

Understanding why a company may have a higher or lower float is an important factor for investors to take into consideration, because it can reveal (or be tied to) other aspects of the company’s management or status.

Are low-float stocks good for day trading?

Low-float stocks can garner huge profits for day traders when a particular industry, sector, or company is in high demand. But when demand shifts, low-float stocks can be risky.

What’s the difference between high- and low-float stocks?

You can find a company’s float by taking the total number of shares outstanding and subtracting the number of shares that are closely held or restricted. If the remainder is a high percentage of the outstanding shares, that’s considered a high-float stock — which can indicate the stock has a certain amount of liquidity.

If the remainder is a small percentage of the outstanding shares, that indicates a low-float stock, which generally has a higher spread, lower liquidity, and may be more volatile.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Photo credit: iStock/damircudic

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

SOIN-Q325-072

Benefits, Drawbacks, and Options of a Self-Directed 401(k) Plan

What Is a Self-Directed 401(k) Account?

Who Is Eligible for a Self-Directed 401(k)?

How to Set Up a Self-Directed 401(k)

Pros and Cons of Self-Directed 401(k)s

Pros of Self-Directed 401(k) Plans

Cons of Self-Directed 401(k) Plans

How Much Money Can be Put in a Self-Directed IRA?

Common Self-Directed 401(k) Investments

Real Estate Investment Trusts (REITs)

Precious metals

Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules

Real Estate With Family Ties

Loans

No Investment Benefit Beyond Asset Returns

The Takeaway

FAQ

What is the difference between an individual 401(k) and a self-directed 401(k)?

Can I roll my traditional 401(k) into a self-directed 401(k)?

How is a self-directed 401(k) taxed?

Investing in Growth Funds

What Is Growth Investing?

Growth Companies, Growth Strategies

Growth Fund Performance

Examples of Growth Stocks

Benefits of Investing in Growth Mutual Funds

Downside of Growth Mutual Funds

Evaluating a Company’s Potential for Growth

Buying Growth Mutual Funds

Investing for Growth or Value?

Determining When to Invest in Growth Mutual Funds

The Takeaway

FAQ

Do growth funds pay dividends?

How risky is a growth fund?

Which is better, investing for growth or income?

What Are Stock Delistings and Why Do They Occur?

How Stock Listings Work

What Does Delisting a Stock Mean?

Exchange-Initiated Stock Delisting

Company-Initiated Stock Delistings

What Happens If a Stock Is Delisted?

What to Do If a Stock You Own Is Delisted

The Takeaway

FAQ

Why would a stock get delisted?

Is delisting a stock good or bad?

What happens to my stock if a company delists?

What Is an IPO Roadshow?

What Is a Roadshow?

How Roadshows Work

New Digital Roadshows

Importance of Roadshows

Pros and Cons of a Roadshow

The Takeaway

FAQ

What is the purpose of a roadshow?

How long after the roadshow is the IPO?

Are IPO roadshows public?

Understanding Low-Float Stocks

Stock Float: Quick Recap

What Are Low-Float Stocks?

Understanding Shares Outstanding

Floating Stock, Example Calculation

Importance of Low-Float Stocks

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Benefits of Trading Low-Float Stocks

6 Reasons for Low-Floating Shares

1. Special Purpose Acquisition Companies (SPACs)

2. The Company Is Family Operated

3. Stock Buybacks

4. Company Has Donated Shares to Its Charitable Foundation

5. Initial Public Offerings (IPOs)

6. Stock-Based Compensation

Evaluating Low-Float Stocks

High Relative Volume

News Events

Float Percentage

How to Trade Low-Float Stocks

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