InvestLL Archives

Sep

2025

Guide to Morningstar Ratings

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

Table of Contents

What Are Morningstar Ratings?
How Morningstar Ratings Work
How Morningstar Measures Volatility
Example of a Morningstar Rating
Are Morningstar Ratings Accurate?
How Should Investors Use Morningstar Ratings?
Morningstar Ratings for Funds
Other Investment Risk Rating Providers
FAQ

Morningstar is a well-respected global financial services and research company that provides data, analysis, ratings, and a range of tools to help institutional and individual investors sort through and evaluate some 600,000 investment vehicles.

Since 1984, Morningstar has conducted independent research on stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. While the company collects and analyzes data on many aspects of many different assets, it’s primarily known for its five-star rating system.

Morningstar ratings aren’t predictive. But because their research is conducted independently, they are able to provide an evaluation of past performance, and potential risks and return factors that many investors find useful.

Key Points

• Morningstar is an independent financial services research firm that collects data on a wide range of securities.

• Morningstar is principally known for its five-star ratings system, which reflects the past performance of stocks, bonds, mutual funds, and ETFs.

• The five-star rating system is based on historic data, so while it’s not predictive, these ratings help identify potential risks, as well as the potential for returns.

• In addition to its ratings, Morningstar offers investors an array of tools, such as stock screeners, portfolio trackers, and more.

• While well-respected, Morningstar cannot accurately predict the performance of any asset, and investors typically use these and other tools in combination.

What Are Morningstar Ratings?

The Morningstar ratings system is a tool investors can use to compare financial securities such as mutual funds and ETFs, stocks, bonds, and other securities. Particularly valuable to investors: Morningstar ratings evaluate risk-adjusted as well as price-adjusted returns of investments.

Morningstar is an independent financial services company, and thus relies on its own data and research to evaluate the performance, risks, pricing, and other aspects of certain investment products.

Morningstar reviews of mutual funds and ETFs also reflect how a fund performs relative to its benchmark and to its peers. The main Morningstar ratings investors may turn to learn more about a particular investment are the Star Ratings and Analyst Ratings. (Morningstar also has a separate ratings system for individual stocks.)

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

Recommended: Stock Trading Basics

How Morningstar Ratings Work

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

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

The “Star Rating” Explained

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

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

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

Morningstar ratings are free, and investors who are selecting investments for a traditional IRA, Roth IRA, or other retirement or investment account, may find it helpful to sort through the many available options.

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

Recommended: Investing in Growth Funds

The “Analyst Rating” Explained

The Morningstar Analyst Rating takes a different approach to ranking funds and ETFs. Instead of looking backward, the qualitative analyst rating looks forward to assess a fund’s ability to outperform similar funds or a market benchmark.

Rather than using stars, funds receive a rating of Gold, Silver, Bronze, Neutral or Negative, based on the analyst’s outlook for performance.

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

When ranking funds, analysts look at three specific metrics:

• People

• Process

• Parent

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

Generally speaking, these Morningstar reviews go into more detail, in terms of the analysis, ranking, and comparison of funds.

How Morningstar Measures Volatility

Morningstar uses a few key volatility measurements as it aims to minimize risk and maximize returns through strategic diversification. Chief among those measurements are standard deviation, mean, and the Sharpe ratio.

It’s a somewhat complicated process, but using these three measurements in tandem helps Morningstar get a handle on volatility and make appropriate ratings decisions.

Example of a Morningstar Rating

Morningstar star ratings are free to access for investors on the company’s website, and it’s relatively easy to find plenty of examples of Morningstar ratings on the platform. For instance, to find a star rating for a particular fund or ETF you’d simply search for it using its name or ticker symbol.

You can also view Morningstar ratings and picks for funds by category, such as small-cap funds or U.S. or international index funds.

Here’s an example of a Morningstar rating for the Vanguard Total International Stock Index (VTIAX), as of Sept. 6, 2025. This fund, which is in the foreign large-blend category and is an index fund, has a three-star rating from Morningstar — and a Gold Morningstar analyst rating.

The fund has a lower expense ratio for its category of 0.09%, a minimum investment of $3,000 and $525.7 billion in assets.

While the three-star rating may sound middle-of-the road, it’s likely due to the fund’s slightly higher risk profile. But the Gold analyst rating indicates that the fund has a lower cost, and an extensive market-cap-weighted portfolio that tracks the FTSE Global All Cap ex US Index, which has over 8,000 constituents, providing investors with diversification in overseas equities.

This is just one example. Morningstar researches and provides ratings for thousands of assets in a range of categories and products.

Are Morningstar Ratings Accurate?

Morningstar fund ratings are designed to be a guide as you invest; they cannot predict how well a fund is likely to perform. For example, there’s always going to be risk involved when investing, so don’t expect any rating to be a sure-thing.

Assessing the Reliability of Morningstar Ratings

So, how well do Morningstar ratings perform over time and are they an accurate guide for investing? According to Morningstar’s own analysis of its ratings system, the star ratings can be a useful jumping-off point for investors. That analysis resulted in three key findings:

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

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

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

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

Use Expense Ratios

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

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

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

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

How Should Investors Use Morningstar Ratings?

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

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

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

Risks of Morningstar Ratings

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

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

Looking only at Morningstar reviews without doing your own due diligence could cause you to invest in funds that aren’t the best fit for your portfolio. Or you may overestimate how well a fund will perform, only to be disappointed later.

Morningstar Ratings for Funds

Morningstar’s original rating system of one to five stars enabled investors to evaluate a fund’s past performance within four broad asset classes: domestic equity funds, international equity funds, taxable bond funds, and municipal bond funds.

One useful aspect of the ratings is that they include risk-adjusted and cost-adjusted returns for investors. Given that most investors own several, sometimes many different mutual funds and ETFs in their portfolios and retirement accounts, Morningstar also offers a Category rating — which allows investors to evaluate a fund within a smaller more relevant grouping of related assets.

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

Other Investment Risk Rating Providers

Morningstar is just one of many companies that offers investment ratings. Bloomberg, Nasdaq Market Data Feeds, S&P Global Market Intelligence, MarketWatch, Thomson Reuters, and others all offer investment ratings, rankings, stock and fund screeners, and other tools.

In addition, many financial institutions collect and analyze their own data and offer proprietary metrics and tools that investors can also use to assess those products.

Investors should take into account who is collecting the data, and where that data comes from, when deciding what type of investment rating to use for their own portfolios.

The Takeaway

Having reliable research tools can help you make educated decisions about where and how to invest. Morningstar ratings are one tool you can use. But keep in mind that there are many ratings services on the market, and that Morningstar’s ratings are far from the only research tool out there.

It’s also important for investors to keep in mind that all investments involve risk, whether they’re highly rated or not.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

How reliable are Morningstar ratings?

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

Is a Morningstar rating of “5” good?

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

Why do investors use Morningstar?

Individual and institutional investors alike use Morningstar ratings to help sort through and evaluate the hundreds of thousands of available investment products. Morningstar has developed a reputation for being reliable, because its data is collected and analyzed independently of any financial firm.

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.

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.

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.

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.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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.

SOIN-Q325-098

Sep

2025

How to Trade ETFs: X Strategies for Retail Investors

How to Trade ETFs: A Guide for Retail Investors

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

Table of Contents

What Is an ETF (Exchange-Traded Fund)?
4 Reasons to Consider Trading ETFs
What Are the Risks of Trading ETFs?
How to Trade ETFs
FAQ

Trading ETFs is, in many ways, similar to trading stocks or other securities, and can be done on most stock-trading platforms or brokerages. And while conventional wisdom suggests investors are limited in what they can do with an exchange-traded fund (ETF), an investor can likely find a fund that fits their portfolio.

But investors have different goals and strategies, and that may include trading or otherwise buying and selling ETFs frequently. Trading ETFs is fairly simple, though, and investors would do well to know how to trade ETFs.

Key Points

• ETF trading is similar to stock trading, and is available on various platforms.

• Market orders execute at the best available current prices, while limit orders execute at specific prices or better.

• ETFs offer liquidity and a wide range of investment options.

• Trading strategies may be based on technical and fundamental analysis.

• Risks are comparable to stocks, but the liquidity of ETFs may help investors manage downside risks.

What Is an ETF (Exchange-Traded Fund)?

An exchange-traded fund, or ETF, is a popular investment vehicle that enables investors to buy a group of stocks in one bundle, thus promoting investment diversity and efficiency. They’re widely available, usually through major investment fund companies.

ETFs aren’t mutual funds, although they originate from the same fund investment family. One of the primary differences between the two is that mutual funds are usually more expensive than exchange traded funds, since mutual funds are typically actively managed while ETFs are usually passively managed.

Another benefit of ETFs is that whereas mutual funds can only be traded after the end of the market day, ETFs can be traded during open market sessions at any point in the day. ETFs have become wildly popular, too, over the years.

💡 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.

Different Types of ETFs

ETFs come in a variety of different types, including the following:

• Stock ETFs: This type of ETF is composed of various equity (stock) investments.

• Bond ETFs: Bond ETFs hold different types of bond vehicles, like U.S. Treasury bonds, utility bonds, and municipal bonds.

• Commodities: Commodity ETFs are popular with investors who want exposure to gold, silver, copper, oil, and other common global commodities.

• International ETFs: Global-based ETFs often include country-specific and location-specific funds, like an Asia ETF or a Europe ETF, which are made up of companies based in the country featured in the ETF.

• Emerging market ETFs: This type of ETF is composed of stocks from up-and-coming global economies like Indonesia and Argentina.

• Sector ETF: A sector ETF is focused on an economic sector, like manufacturing, health care, climate change/green companies, and semiconductors, among others.

Recommended: Tips on How to Choose The Right ETF

4 Reasons to Consider Trading ETFs

Trading ETFs offers the same advantages (and risks) associated with trading common stocks. These features and benefits are at the top of the list.

1. ETFs Can Provide Liquidity

In a multi-trillion dollar market, there is likely no shortage of investors looking to buy and sell ETFs. By and large, the bigger the market, the more liquidity it provides, and the easier it is to move in and out of positions.

2. There are Different Investment Options

With ETFs widely available in categories like stocks, bonds, commodities, and more recently, green industries and others, ETF traders have plenty of investment options.

3. ETFs Offer Portfolio Diversity

Investment specialists often extol the virtue of a diverse portfolio, i.e., one made up of both conservative and more aggressive investments that can balance one another and help reduce risk. With so many classes of ETFs available, it’s relatively easy to build an ETF trading portfolio that has different asset classes included.

4. ETFs Are Relatively Inexpensive to Trade

Exchange-traded funds are typically inexpensive to buy, with some brokerage platforms may offer commission-free ETFs.

What Are the Risks of Trading ETFs?

The main risk associated with trading ETFs is the same as with trading stocks, as you could lose money. While shedding cash is always a threat when trading any security, the liquidity associated with exchange-traded funds makes it relatively easy to sell out of a position if needed. A candid conversation with a financial advisor may help investors deal with ETF investment trading risks.

How to Trade ETFs

Just as you can trade stocks, you can trade ETFs, too, by taking these steps.

▶️

Video: How to Invest in ETFs with SoFi
Learn the basics in under 2 minutes.
Watch Now

Step 1. Choose a Trading Platform

Traditionally, investors trade stocks through a brokerage house or more recently via an online broker. As with most things in life, it’s generally a good idea to look around, kick some proverbial tires, and choose a broker with the best ETF trading services for you.

Investors can choose from different categories of ETF trading accounts, ranging from standard trading accounts with basic trading services to retirement accounts, specialty accounts, or managed portfolio accounts that offer portfolios managed by professional money managers.

Step 2. Select an ETF Trading Strategy

The path to successful ETF trading flows through good, sound portfolio construction and management.

That starts with leveraging two forms of investment strategy — technical or fundamental analysis.

• Technical analysis: This investment strategy leverages statistical trading data that can help predict market flows and make prudent ETF trading decisions. Technical analysis uses data in the form of asset prices, trading volume, and past performance to measure the potential effectiveness of a particular ETF.

• Fundamental analysis: This type of portfolio analysis takes a broader look at an ETF, based upon economic, market, and if necessary, sector conditions.

Fundamental analysis and technical analysis can be merged to build a trading consensus, typically with the help of an experienced money manager.

Any trading strategy used to build ETF assets will also depend on the investor’s unique investment needs and goals, and will likely focus on specific ETF portfolio diversification and management. For example, a retiree may trade more bond ETFs to help preserve capital, while a young millennial may engage in more stock-based ETF portfolio activity to help accumulate assets for the long haul.

Step 3. Make the Trade

Executing ETF trades is fairly straightforward for retail investors. It may be best to consider starting out with small positional trading, so that any rookie mistakes would be smaller ones, with fewer risks for one’s portfolio.

Here are two trading mechanisms that can get you up and running as an ETF trader:

• Market order. With market order trading, you buy or sell an ETF right now at the current share price, based on the bid and the ask — the price attached to a purchase or a sale of a security. A bid signifies the highest price another investor will pay for your ETF and the ask is the lowest price an ETF owner will sell fund shares. The difference between the two is known as the trading “spread.”

A word of caution on market trades. ETFs tend to have wider trading spreads than stocks, which could complicate you’re getting the ETF shares at the price you want. Share trading spreads of 10% are not uncommon when trading ETFs.

• Limit trade orders. An ETF limit order enables you to dictate terms on an ETF purchase or sale. With a limit order, you can set the top price you’ll pay for an ETF and the lowest price you’ll allow when selling an ETF.

For investors who have qualms about buying or selling an ETF at a fixed price, limit orders can be a viable option, as they allow the investor to set the terms for a trade and walk away from an ETF trade if those terms aren’t met.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Historically, exchange traded funds have been used primarily as passive, “buy and sell investments.” But as asset trading grows more exotic in the digital age, trading ETFs has become increasingly popular. It’s fairly simple to trade ETFs, too, as most investors simply need access to an online trading platform or brokerage.

As with any investment, though, there are risks to consider. While ETFs can be a great starting point for many investors, they’re not entirely safe investments, and investors should do their research before buying shares of any specific ETF, as they would with any other type of security.

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

FAQ

What are some different types of ETFs?

Different types of ETFs include stock ETFs, bond ETFs, international ETFs, emerging market ETFs, and sector ETFs, among others.

What are some advantages of investing in ETFs?

While there may be drawbacks to consider, some of the advantages of investing in ETFs are that they’re relatively liquid investments, there are numerous different types and options available, they can help diversify a portfolio, and are relatively inexpensive.

Is an ETF the same as a mutual fund?

ETFs aren’t mutual funds, although they may be similar. The primary differences between the two is that mutual funds are usually more expensive than exchange traded funds. Mutual funds tend to be actively managed, too.

Photo credit: iStock/PeopleImages

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.

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

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q325-123

Sep

2025

What Is a Direct Stock Purchase Plan (DSPP)?

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

Table of Contents

Direct Stock Purchase Plans (DSPP), Explained
Pros and Cons of a DSPP
How To Invest in a DSPP
What to Consider Before Buying DSPPs
FAQ

A direct stock purchase plan (DSPP) is a plan that allows investors to purchase stock in a company without a broker and get it directly from the company instead. With DSSPs, fees, if any, are often low.

Meanwhile, discounts to the share prices may be available for larger purchases. With shares purchased through a DSPP, investors have the same profit and loss opportunities, access to dividends, as well as stockholder voting rights. However, direct stock purchase plans may not be right for every investor.

Key Points

• A Direct Stock Purchase Plan (DSPP) allows company stock to be purchased directly, often at a discount, without a broker.

• DSPPs may offer a low initial investment, dividend reinvestment, and shareholder rights, making them accessible for long-term investors.

• Potential drawbacks include limited diversification, investment caps, and fees when selling shares.

• Commission-free trading in brokerages has reduced the cost-saving appeal of DSPPs.

• Companies such as Walmart, Coca-Cola, Starbucks, The Home Depot, and Best Buy offer or have offered DSPPs to investors.

Direct Stock Purchase Plans (DSPP), Explained

What is a direct stock purchase plan? Typically, many investors use a broker to buy shares of stock. But you can sometimes purchase stocks directly from companies, no broker required. This is what it means to participate in a direct stock purchase plan.

Many blue-chip stocks tend to offer DSPPs. For example, let’s say Company X offers a plan that allows investors to buy $500 or more worth of company stock directly from it, up to $250,000 a year, with some service and transaction fees.

With a DSPP, investors directly purchase shares, sometimes at a small discount. Discounts can range from 1% to 10% to encourage investors to buy more shares. However, because many brokerage accounts now waive fees and commissions entirely for many investors, the savings difference is smaller than it used to be.

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

Pros and Cons of a DSPP

Direct stock purchase plans have benefits and drawbacks.

Pros

Pros of DSPPs include:

• No broker needed. Investors can purchase shares of stock directly from the company.

• Very little money is required to get started, and the process is typically simple to do, making them good for long-term investing.

• Some DSPP programs offer dividend reinvestment plans.

Cons

Cons of DSPPs include:

• An investor may not achieve portfolio diversification because not all stocks offer DSPPs.

• Companies may put maximum limits on how much an individual investor can purchase.

• When selling DSPP stocks, multiple types of fees can sometimes be charged.

How To Invest in a DSPP

Armed with information about how to buy directly from companies, investors may want to explore what specific opportunities exist. Perhaps they already have a publicly traded company in mind. In that case, they can go to that company’s investor relations website to see if the company offers this type of investment opportunity.

They can also search on the Internet to see which direct stock purchase plans are available.

More specifically, if someone wants to buy stocks in this way, they typically open an account and make deposits into it. Usually, these deposits are automatically made monthly through an ACH funds transfer from the investor’s bank account. In some cases you can write checks as well.

Then, that dollar amount is applied toward purchasing shares in that company’s stock, which can include fractional shares. For example, let’s say that one share of a company’s stock currently costs $20. If an investor sets up an ACH withdrawal of $50 monthly, then, each month they have purchased 2.5 shares of that company’s stock.

One of the benefits of investing through a direct stock purchase plan is the ability to incrementally invest in an inexpensive way. This might make it a good choice for some first-time investors with smaller amounts of money to invest, with initial deposits ranging from $100 to $500. In some cases, initial deposit minimums can be waived if you purchase a certain dollar value of stock every month. But again, it may be difficult to achieve portfolio diversification with DSPP.

Companies With DSPPs

A number of large, well-established companies offer DSPPs. Companies with direct stock purchase plans include Walmart, The Coca-Cola Company, Starbucks, and The Home Depot, and Best Buy, among others.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

What to Consider Before Buying DSPPs

When online investing was new, people typically needed to pay significant fees to brokers to buy stock. In that era, direct stock purchase plans could be money-savers for investors. Over time, though, fees for online investing have lessened, making this less distinctive of a benefit.

In addition, many DSPPs charge initial setup fees, and may have other investment fees, including ones for each purchase transaction or sale. Although they may be small, these fees can build up over time. And it may be challenging to re-sell shares without the use of a broker, which makes this investment strategy more of a long-term one.

Plus, any time a share is purchased, some degree of stock volatility comes along with it, though the level of volatility that may exist depends on many variables.

Here’s something else to consider: When owning stock in just one company, or only a couple of them, portfolios aren’t diversified. When you diversify your investment assets, it helps to spread out the degree of risk. That’s because, if one stock’s value decreases, others may rise to balance out that portfolio.

The Takeaway

Direct stock purchase plans are when individual investors can directly purchase shares of that company’s stock without the need for broker involvement. The benefits of DSPPs potentially include purchasing company shares at a discount, and not needing a broker to make the transaction.

The downside of DSPPs is that a limited number of companies offer them, which means that an investor who invests solely through DSPPs may not have the best portfolio diversification.

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

FAQ

What is the difference between a brokerage and a direct stock purchase?

The main difference between a brokerage and a direct stock purchase is this: With a direct stock purchase, an investor buys shares of one company. A brokerage, on the other hand, offers multitudes of different stock options an investor may choose from.

What is direct stock vs portfolio stock?

With direct stock, an investor purchases shares of stock directly from a company. A portfolio refers to a collection of different types of investments an investor may have, including stocks, bonds, or stock funds, to name a few.

What is the difference between DSPP and DRIP?

By using a DRIP (dividend reinvestment plan), investors can buy more stock in companies whose shares they own by reinvesting what they earn from dividends. With a DSPP, an investor can purchase stock directly from a company. Unlike a DRIP, they don’t have to use dividends to purchase shares.

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.

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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 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.

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-Q325-119

Sep

2025

How to Buy Bonds: A Guide for Beginners

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

Table of Contents

Why Invest in Bonds
Where Can You Buy Bonds?
What Type of Bonds Can You Buy?
How to Invest in Bonds
FAQ

Bonds are issued by governments, municipalities, and companies as a way to raise money. By investing in bonds, an investor is giving the issuer of the bond a loan for a set period of time. In exchange, the bond issuer pays the investor interest and returns the principal to them when the bond matures at the end of a predetermined period.

Investing in bonds might seem a little mystifying, but bonds can be a way for beginning investors — or any investors for that matter — to help achieve financial goals such as portfolio diversification and earning income. Read on to learn about the different types of bonds and how to invest in them.

Key Points

• Bonds function as loans to entities like the government, municipalities and companies, and they offer regular interest payments and eventual principal repayment.

• Credit ratings are a way to gauge the creditworthiness of the bond issuer and the likelihood that they will repay the debt and not default.

• Bond duration reflects how sensitive bond prices are to interest rate fluctuations.

• Investors can purchase bonds directly from the government or brokerages, or get exposure via mutual funds and ETFs.

• Before investing, investors can assess risks of bonds, including credit risk, interest rate risk, inflation risk, and liquidity risk.

Why Invest in Bonds

Essentially, investing in bonds is a method of lending money to a company or government. As investors choose between the different types of investments, there are several reasons they might opt for bonds. Bonds, which are typically fixed income investments, pay interest at regular intervals, such as twice a year, which provides investors with a predictable stream of income. Also, if investors hold the bond to maturity, they receive the entire principal amount (or par value) of the bond. In this way, investors may preserve their savings while investing.

Bonds are also an important tool for building a diversified portfolio. Compared with stocks, bonds are less volatile, so they can potentially help offset some of the risk inherent to stock investing.

However, while bonds are typically considered a less risky investment, it’s still possible to lose money when investing in them if the issuer is unable to fulfill its obligation. In addition, inflation can eat away at bond returns, since fixed returns tend to be worth less during periods of high inflation.

Where Can You Buy Bonds?

You can buy bonds in a variety from a variety of different sources, depending on the type of bond you’re interested in.

Federal Government

If you’re 18 or older, you can buy government bonds directly from the federal government through the TreasuryDirect website. The site gives investors access to Treasury bills, notes, bonds, Floating Rate Notes, Treasury Inflation-Protected Securities, and savings bonds.

Brokerage Account

Investors can buy a variety of bonds, including corporate, municipal, and government bonds, through their brokerage account. Bond prices vary depending on transaction fees and markups.

Exchange-traded Fund (ETF) or Mutual Fund

Rather than buying bonds outright, investors can gain access to them by buying shares of ETFs or mutual funds that invest in bonds.

Diversification is one main reason for investing in funds. Because issuers typically sell individual bonds in large units (a single bond might cost $1,000 or more, for instance) the average investor may only be able to purchase a few of them on their own, making it tricky to put together a diversified bond portfolio.

Meanwhile, funds typically hold a diversified basket of bonds that tracks a bond index or a certain sector of the bond market, making it much easier for individuals to diversify. It’s important to note that while the yield of individual bonds is fixed, the yield on bond mutual funds or ETFs can fluctuate over time.

💡 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.

What Type of Bonds Can You Buy?

There are a few basic types of bonds you may consider buying:

Corporate Bonds

Corporate bonds are a type of debt security issued by public and private corporations. Investment banks typically underwrite the debt and issue it on the entity’s behalf. Companies use the money they raise through bond sales for a variety of purposes, such as investing in new equipment, research and development, paying investor dividends, and stock buybacks.

Municipal Bonds

States, cities, and counties issue municipal bonds, sometimes called “munis,” to finance capital expenditures like the building of new roads or bridges. There are three general types of municipal bonds:

• General obligation bonds aren’t backed by assets, but rather the “full faith and credit” of the issuer. Governments have the power to tax residents to pay bondholders back.

• Revenue bonds are backed by revenue from a specific source, such as highway tolls. That said, some revenue bonds are “non-recourse” meaning that if the revenue source disappears, bondholders have no claim to it.

• Conduit bonds are issued on behalf of private entities like hospitals.

US Treasurys

The Department of the Treasury issues U.S. Treasury bonds for the federal government. Investors typically consider Treasurys one of the safest investments, since they have the full faith and credit of the U.S. government backing them.

• Treasury bills are short-term debt obligations that mature within one year or less. They are sold to investors for less than their face value but they pay their full value at maturity.

• Treasury notes are longer-term debt securities that mature within 2, 3, 5, 7, or 10 years and pay interest every six months.

• Treasury bonds mature in 20 or 30 years and pay bondholders interest every six months.

• Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy TIPS with maturities of five, 10 and 30 years, and they pay interest every six months.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Bond Mutual Funds

A mutual fund is a pool of money that’s invested by an investment firm according to a set of stated objectives. A bond mutual fund focuses specifically on bonds. They may concentrate on one type, such as corporate bonds, or they may contain all types. Unlike traditional bonds, investors do not hold the bond funds for a set period or receive a principal payment at maturity. Rather, the value of the bond fund can fluctuate with market demand. There may also be ongoing fees and expenses associated with owning shares of the mutual fund.

Bond ETFs

Like bond mutual funds, bond ETFs represent a way for investors to pool their money and spread it across many different investments. While investors can only trade mutual funds once a day, they can trade ETFs throughout the day. ETFs may have lower fees than mutual funds.

How to Invest in Bonds

As investors are exploring investing in bonds, it’s important to consider the following factors:

Credit Ratings

Credit ratings are a way to gauge the creditworthiness of companies or governments that issue bonds. The ratings give investors an idea of how likely the bond issuer is to default. Standard & Poor’s, Moody’s, and Fitch are the three private companies that control most bond ratings. The rating system is slightly different at each company, but generally speaking, a mark of AAA represents the highest rated and least likely to default issuers, while C or D denotes the riskiest issuers.

Duration

A bond’s duration is not the same at its term, or maturity. Rather it is a measure of how sensitive a bond’s price will be to changing interest rates. The longer a bond’s duration, the more likely its value will fall as interest rates rise.

Fees

If you buy bonds through a broker, you should expect to pay transaction fees. Brokers typically markup the price of a bond when they sell it to you in lieu of charging a commission. Markups may be anywhere from 1% to 5% of the bond’s original value, though the exact amount can vary based on the type of bond, the size of the transaction, and market conditions. Look for brokerages that have low fees and markups.

Risk Level

Before buying a bond, investors should understand the associated risks, including:

• Credit risk: The risk that issuers may fail to make interest payments and default on the bond.

• Interest rate risk: The possibility that changes in interest rate will raise or lower a bond’s value if sold before maturity.

• Inflation risk: The risk that inflation will decrease the value of bond returns.

• Liquidity risk: The risk an investor won’t be able to sell their bond when they want to due to low or no demand.

Timing

You might consider matching the maturity date to your investment timeline. For example, if you need your principal in five years to make a down payment on a house, you may not want to buy a 10-year bond. While you could sell the 10-year bond after five years, market conditions could make it less valuable than if you waited until maturity.

The Takeaway

Whether purchased individually or accessed through mutual funds or ETFs, bonds provide a way for investors to diversify their portfolios. They may also be able to help investors develop a stream of income, which can become increasingly important as they move toward retirement.

Before buying a bond, it’s important to research issuers and credit ratings to be sure you aren’t taking on undue risk. In addition, investors will want to make sure that whatever they buy fits into their long-term investment plan.

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

🛈 While SoFi does not offer direct purchases of bonds, you can gain exposure to the bond market by purchasing bond funds through our online investment platform.

FAQ

Are bonds a safe investment?

Bonds are generally considered a less volatile investment than stocks. However, investing in bonds does involve risk. How sound a bond is depends on such factors as the issuer of the bond and whether they are able to fulfill their payment obligations, and the bond’s credit rating. Different types of bonds involve different levels of risk. For instance, U.S. Treasury bonds are considered the safest bonds because they are backed by the U.S. government and have a minimal risk of default.

Is it better to hold cash or bonds?

Whether it’s better to hold cash or bonds depends on your timeline, risk tolerance, and goals. Cash is typically better for short-term needs, while bonds may be better as longer-term investments. Both have pros and cons. Cash could lose its buying power due to inflation, but it’s a completely liquid asset and offers protection against volatile markets. Bonds can provide consistent income through regular interest payments, but they carry the risk of default — if the bond issuer defaults, you could lose some or all of your investment. Consider all these factors to decide what’s right for you.

Will you lose money on a bond if you hold it to maturity?

Generally speaking, when an investor holds onto a bond until maturity, they receive the face value of the bond, which is the amount the issuer agrees to pay at maturity, in addition to the interest received. Those planning to hold until maturity, rather than sell beforehand, may be less concerned about interest rate risk, which is when changes in the interest rate increase or decrease a bond’s value. However, holding a bond to maturity is not risk-free — there is a possibility that the bond issuer could default on the bond or that rising inflation could erode the purchasing power of the bond’s return.

Photo credit: iStock/ILIA KALINKIN

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.

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.

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

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-Q325-086

Sep

2025

Testing the Waters: What It Means in an IPO

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

Table of Contents

Testing the Waters During the IPO Process
Purpose of Testing the Waters
What the JOBS Act Meant for Testing the Waters
What Does This Mean for Investors?
Investing in IPO Stocks
FAQ

Testing the waters in the initial public offering (IPO) process allows companies that are considering going public to gauge how successful their prospective IPO would be — without going through the actual IPO process.

The Securities and Exchange Commission (SEC) voted in 2019 to adopt a new rule to allow companies interested in going public to test the waters (TTW). Specifically, the SEC formally rolled out Rule 163B under the Securities Act on December 3, 2019.

The IPO process can be long, costly, and risky, and some companies can be reluctant to try going public. But the ability to test the waters by communicating with potential investors, assessing their interest, and examining how an IPO would be received, is valuable before having to go all-in on a public offering.

Key Points

• Testing the Waters (TTW) is an SEC rule that allows companies to gauge the success of a prospective IPO without going through the actual process.

• The JOBS Act of 2012 allowed small businesses to communicate with Qualified Institutional Buyers (QIBs) and Institutional Accredited Investors (IAIs).

• Testing the Waters allows companies to assess investor interest, explain the direction of the company, and strengthen areas of weakness.

• The expanded rule for all issuers allows for greater transparency and communication between IPO-hopeful and the markets, as well as investors.

• Investors have access to additional information about a company’s expected IPO and more time to decide whether to invest.

Testing the Waters During the IPO Process

Starting in 2012, testing the waters was available only for emerging growth companies, also known as EGCs. In 2019, testing the waters was extended to all issuers to increase the chance of a company successfully completing an initial public offering (IPO), and to encourage issuers to enter the public equity markets.

So, what does testing the waters mean, and how does it work? Essentially, testing the waters is a way for issuers to dip their toes in the water, so to speak, and gauge the temperature before fully jumping into the IPO process.

When the new SEC rule was adopted in September 2019, Chairman Jay Clayton said, “Investors and companies alike will benefit from test-the-waters communications, including increasing the likelihood of successful public securities offerings.”

Details of the TTW rule

The TTW rule allows issuers to assess market interest in a possible IPO (or other registered securities offering) by being able to discuss the IPO with certain institutional investors before, or after, the filing of a registration statement.

Generally, issuers set up TWW meetings with investors after the issuer has filed with the SEC and received initial comments. They could potentially speak with specific issuers before filing with the SEC, but issuers typically want to align on the first round of SEC comments and then have a clear direction when speaking with potential investors.

Example of Testing the Waters

In late spring of 2022, a tech company that created a platform for grocery delivery, decided to test the waters for a potential IPO.

There were good reasons for the company to be cautious. The market had seen a steep drop since the beginning of the year, and investors had largely cooled on tech stocks, with tech IPOs taking a noticeable hit year-over-year.

Thanks to taking this step, the company was projected to IPO by the end of 2022, using the interim period to adjust their valuation and their path forward, given the competition in the space.

To sum it up, testing the waters allows companies to see what investors say, answer questions, and potentially identify areas of weakness that could be strengthened.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

Purpose of Testing the Waters

Testing the waters has two chief aims: The first is communicating with potential investors to explain the direction of the company and gathering their feedback. The second is to evaluate the market before having to invest large sums in an actual IPO.

Communication with Potential Investors

In addition to giving issuers a chance to see whether their offering will be successful, TWW allows companies to communicate highly specific information.

Some industries call for greater detail of information from investors, which makes testing the waters ever more critical.

For example, in the life sciences industry, testing the waters is popular because issuers tend to have a shorter operating history and also need to communicate detailed scientific information to their potential investors. For these types of industries and issuers, testing the waters is highly beneficial.

Cost-Effective Market Evaluation

Testing the waters allows issuers to determine whether it makes sense for them to devote the time and resources to filing an IPO. Before the TWW rule, many companies avoided the IPO process because of the cost and not having clarity around investor demand.

Testing the waters takes away some of those risks and provides more information as a company enters the IPO. In a sense, it allows for a company to evaluate the market, and for the market, in turn, to evaluate the company exploring an IPO.

Recommended: How Are IPO Prices Set?

What the JOBS Act Meant for Testing the Waters

In 2012, Congress under President Obama passed the Jumpstart Our Business Startups Act (also known as the JOBS Act) to revitalize the small business sector. The JOBS Act, which created Section 5(d) of the Securities Act, made it easier for small businesses, also known as emerging growth companies or EGCs, to gain access to funding. It removed certain barriers to capital and reduced regulation to companies with less than $1 billion in revenue.

The enactment of the JOBS Act also allowed small businesses to communicate with potential investors — qualified institutional buyers (also known as QIBs) and institutional accredited investors (or IAIs). By communicating with potential investors before or after filing a registration statement, EGCs were given the ability to get a sense for interest in a potential offering.

With the expansion of that rule in 2019 to include all issuers, not just EGCs, more opportunity opened up for a range of businesses.

What Does This Mean for Investors?

While it makes good business sense to expand regulations and allow all businesses considering an IPO to test the waters, just what does this all mean for the average retail investor?

First, the expanded test-the-waters rule for all issuers allows companies more flexibility when determining whether to move forward with an IPO. For investors, the expanded rule means that they have access to communication from issuers regarding upcoming IPOs. They also have more time to determine whether it’s the right investment for them.

This can be valuable for retail investors, who may benefit from having additional information about a company’s expected IPO. Investing in IPO stock can be highly risky, as IPO shares are typically quite volatile.

In short: Testing the waters gives more flexibility to both issuers and investors.

💡 Quick Tip: How do you decide if a certain online trading platform or app is right for you? Ideally, the online 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.

Investing in IPO Stocks

IPOs have been popular among investors and certain IPOs can generate excitement in the investor community. Prices on the day of an IPO and immediately afterward tend to produce volatile price movements, which can produce large gains or losses. The 2019 SEC rule that allows any company to test the waters before committing to the IPO process can be helpful to businesses as well as investors.

TTW, as the rule is known, allows for greater transparency and communication between the IPO-hopeful and the markets, as well as investors, prior to the full-blown IPO process. This enables companies to adjust their strategy for the IPO, and it allows investors to assess whether they want to invest.

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

Is testing the waters an offer?

No, testing the waters is not an offer. Testing the waters in the IPO process allows issuers, which are corporations, investment trusts, and so on, to gauge interest and investor demand for a potential IPO without actually having to go public.

What is the post-IPO quiet period?

The quiet period is a set amount of time when the company cannot share promotional publicity or forecasting, or express opinions about the value of the company. In an IPO, the quiet period begins when a company files registration with U.S. regulators and the registration becomes effective and extends for a mandated period of time after the stock starts trading.

What is an analyst day in an IPO?

When planning to go public, the issuer or company meets with syndicate analysts who do not work for the issuer or the company going public to give them a deeper understanding of the company. This type of meeting, also called an “analyst day,” is important because analysts create their own opinion about the issuer. They then help educate the market about the company once the transaction has launched.

Photo credit: iStock/LumiNola

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.

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.

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.

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.

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-Q325-081