Market manipulation is exactly what it sounds like: using some sort of manipulation or even fraud to change the behavior of the stock market in an attempt to profit or generate returns. Market manipulation is not uncommon, and there are several methods or strategies that can be used to engage in it.
Given the legal perils, and the chance that investors could get caught up in various forms of market manipulation, it’s critical to have a basic understanding of what it is and what it can look like.
What Is Market Manipulation?
According to the U.S. Securities and Exchange Commission, the definition of market manipulation is the “Intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities, or the Intentional interference with the free forces of supply and demand.” Basically, any action to impact the supply or demand for a stock and drive a stock’s price up or down by artificial means constitutes stock market manipulation.
The SEC views market manipulation as harmful, since the practice “affects the integrity of the marketplace.” According to the regulatory agency, financial market prices “should be set by the unimpeded collective judgment of buyers and sellers.” Anything else “undermines fair, honest and orderly markets.”
The SEC has warned market leaders that investors will “stay out of your market if they perceive that it is not fair and is subject to market manipulation.”
What Are Examples of Market Manipulation?
There are several methods that market manipulators use to push the prices of a security in the direction they prefer, creating investment risk for those who fall victim to their schemes.
Pump and Dump
The pump-and-dump scam is a common form of market manipulation. It occurs when a financial market participant who holds a specific investment knowingly issues false or misleading statements about the underlying company on social networking sites or other forms of media.
The goal is to “pump up” the stock with misleading information and artificially inflate the stock as buyers flock in, attracted by the false information provided by the market manipulator. The manipulator shorts the stock or waits for the optimal price point and then sells the stock before reality sets in, the information becomes known as false, and investors sell their holdings.
For example, in a pump-and-dump scheme, a market manipulator may start a rumor that a publicly-traded company is going to be bought by a larger company, which can quickly boost a company’s stock price. If enough investors buy into the rumor, more investors buy the stock, thus elevating the stock price.
Once the price hits a certain level, the market manipulators sell their shares of the stock and pocket a potentially significant profit. Those investors who don’t sell are left with a stock that could tank in price when investors realize the underlying company isn’t being bought out.
The “Wash” Method
Wash trading is a form of market manipulation, an unscrupulous investor, or group of investors acting in tandem, buy and sell the same stock repeatedly over a period of a few days or even a few hours.
By and large, an “active” trading period of a stock is considered a sign of that security’s increase in value, and the stock may swing upward as more investors notice the stock is being actively and even aggressively traded.
This scheme, also known as “painting the tape” or “matched orders” enables a few investors to team up, actively buy and sell a security to paint a picture of a stock drawing interest in the market, and sell the stock for a profit as other investors jump aboard and drive the stock’s price upward.
Tape “Spoofing”
Spoofing is also known as “layering,” and occurs when market manipulators set trading orders with brokers they have no intention of executing. In financial markets, it’s common for market orders to be public. When large orders to buy or sell a certain security are made, other investors jump aboard hoping to piggyback the unexecuted trade, thus drumming up more interest — and more investors — in the security.
Market manipulators leverage that momentum trading, and wait until the time is right to buy or sell the security as other investors’ trader orders are fulfilled. With the “spoof” finalized, the investors who wound up actually executing their trades may then see the stock move against their intended price target. Meanwhile, the “spoofer” has cancelled the trade and taken a profit on the artificial stock price, by buying or selling the security based upon intended market movement.
Marking the Close
When a market manipulator buys a security at the close of the trading day, and pays more than the bid level, or the asking price of the security, that manipulator could be “marking the close.”
As the price of a stock at day’s end is usually a reliable marker for the investment’s price performance going forward, other investors often jump in and buy the stock. The market manipulator leverages the gain and locks in a profit by quickly selling the stock once its price moves upward.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
How to Avoid Market Manipulation
It’s not always easy to see the “red flags” that signal an active market manipulator. However, beginner investors who are aware of common scams may be able to avoid falling victim to their scams.
Invest for the Long Term
Since market manipulators often profit from day-to-day stock movements, investors with long-term portfolios, who don’t engage in market timing, are largely insulated from the impact of market manipulators’ schemes.
Avoid Penny Stocks
Penny stocks, nano stocks, and micro-cap stocks — are often the lowest priced securities on the market and are often low-float stocks, which makes them highly volatile and more vulnerable to the price movements engineered by market manipulators.
Larger stocks, on the other hand, such as mega cap stocks, are less vulnerable to market manipulation due to their trading volume and the level of public scrutiny that they are subject to.
Conduct Due Diligence
When alerted to a potential research report, Internet chatroom or social media comment, or other sources of potentially false or misleading news, resist the urge to immediately trade on the information. That’s exactly what market manipulators expect investors to do, and they profit from impulsive market actions.
Instead, stay calm and do your research to see if there’s any validity to the news–or red flags to indicate manipulation.
Know the Scams
Awareness of schemes such as pump-and-dump or spoofing can make it easier for you to spot them in action.
The Takeaway
Market manipulation is the act of artificially moving the price of a security and profiting from that movement. Even sophisticated investors can fall victim to market manipulation, but understanding how such schemes work can help you spot and avoid them.
Knowing the basics of market manipulation, and how to sidestep it (if possible) can be another tool in an investor’s toolkit. It’s also worth noting that regulators are on the hunt for it, too. If you have further questions, it may be beneficial to speak with a financial professional.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What is the criminal punishment for market manipulation?
Potential punishments for market manipulation depend on the specifics of the crime, the charges, and a potential conviction, but they can involve hefty fines and many years in jail, in some circumstances.
How do big investors manipulate the stock market?
It’s possible that some bad actors spread rumors or false news about market movements in an attempt to influence sentiment, spoofing the markets, or engaging in pump and dump schemes.
How do short sellers impact stock prices?
It’s possible that short sellers can drive the value of a stock down, improving the short sellers’ positions, in the short-term.
Photo credit: iStock/HAKINMHAN
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
While short-term investing can be highly risky, investing for the long term is a time-honored way to manage certain market risks so you can reach important financial goals, like saving for college tuition and retirement.
That’s because when it comes to building a nest egg for these bigger life expenses, saving alone won’t necessarily get you where you need to go. You need the boost of investment returns over time to help your savings grow. That’s where long-term investing, also called buy-and-hold, comes in.
The chief advantage of a long-term investing strategy is that “time in the market beats timing the market,” as the saying goes. In other words, by sticking to an investment plan for the long term, your portfolio is more likely to weather its ups and downs, and fluctuations in different securities.
That said, long-term investing isn’t a risk-free endeavor, and there are also tax implications for holding investments long term. Knowing the ins and outs can make all the difference to your portfolio over time.
10 Tips for Long-Term Investing
So how do you go about establishing a long-term investment plan? These tips should help.
1. Set Goals and a Time Horizon
Your financial goals will largely determine whether or not long-term investing is the right choice for you. Spend time outlining what you want to achieve and how much money you’ll need to achieve it, whether that’s paying for college, retirement, or another big goal.
Once you’ve done that, you can think about your time horizon — when you’ll need the cash — which can help you determine what types of investments are suited to your goals.
For example, if you are saving to buy a car in a couple of years — generally a shorter-term goal — you may consider setting aside money in a savings account, CDs, or money market accounts, which are stable and can provide relatively quick access to your cash.
Stock market investing can be more appropriate for big goals in the distant future, such as saving for a child’s education or your own retirement, which could be 20 or 30 years down the line. This relatively long time horizon not only gives your investments a chance to grow, but it means that you also have the time to ride out market downturns that may occur along the way — which may translate to a better ROI (i.e. a higher return on investment), although there are no guarantees.
2. Determine Your Risk Tolerance
Your risk tolerance is essentially a measure of your ability to stomach volatile markets. It can help you determine the mix of investments that you will hold in your investment accounts — but your risk tolerance also depends on (or interacts with) your goals and time horizon.
Longer time horizons may allow you to take on more risk in some cases, because you’re not focused on quick gains. Which in turn means you might be more inclined to hold a greater proportion of stocks inside your portfolio.
How long should you hold stocks? Generally, holding stocks longer can be beneficial from a tax perspective, and from a risk perspective. The longer you stay invested, the longer you have to recover should markets take a dive.
Setting your risk tolerance also means knowing yourself. If you’re somebody who will be kept up at night when the market takes a downward turn, even if your goal is still 20 years away, then you may not want a portfolio that’s aggressively allocated to stocks. While there are no safe investments per se, it’s possible to have a more conservative allocation.
On the other hand, if short-term market volatility doesn’t bother you, an aggressive allocation may be the best fit to help you achieve your long-term goals.
3. Set an Appropriate Asset Allocation
Understanding your goals, time horizon, and risk tolerance can help give you an idea of the mix of assets — generally stocks, bonds, and cash equivalents — you may want to hold in your portfolio. For example, a portfolio might hold 70% stocks, 30% bonds, and no cash equivalents, depending on the investment opportunities you want to explore.
As a general rule of thumb, the longer your time horizon, the more stocks you may want to hold. That’s because stocks tend to be drivers of long-term growth (although they also come with higher levels of risk).
As you approach your goal, you’ll likely begin to shift some of your assets into fixed-income investments like bonds. The reason for this shift? As you approach your goal — the time when you’ll need your money — you’ll be more vulnerable to market downturns, and you won’t want to risk losing any of your cash.
For example, if the market experiences a big drop, you may be left without enough money to meet your goal. By gradually shifting your money to bonds, cash, or cash equivalents, you can help protect it from stock market swings, so by the time you need your cash, you have a more stable source of income to draw upon.
4. Diversifying Your Investment Portfolio
A key factor of any investing is that portfolio diversification matters. The idea is that holding many different types of assets reduces risk inside your portfolio in the long and short term. Imagine briefly that your portfolio consists of stock from only one company.
If that stock drops, your whole portfolio drops. However, if your portfolio contains stocks from 100 different companies, if one company does poorly, the effect on the rest of your portfolio will be relatively small.
A diverse portfolio contains many different asset classes, such as stocks, bonds, and cash equivalents as mentioned above. And within those asset classes a diverse portfolio holds many different types of assets across size, geographies and sectors, for example.
Different types of stocks
The basic principle behind diversification is that assets in a diverse portfolio are not perfectly correlated. In other words, they react differently to different market conditions.
Domestic stocks for example, might react differently than European stocks should U.S. markets start to struggle. Or investing in energy stocks will be different than tech-stock investing. So, if oil prices drop, energy sector stocks might take a hit, while tech might be less affected.
Many investors may choose to add diversification to their portfolios by using mutual funds, index funds, and exchange-traded funds, which themselves hold diverse baskets of assets.
This tip may seem like a no-brainer, but increasing your time horizon gives you the opportunity to invest in riskier investments, like stocks, for longer. Though risky, stocks typically offer higher earning potential than other types of investments, such as bonds. Consider that the average stock market return annually is about 10%.
Second, the sooner you start investing, the sooner you are able to take advantage of compound growth, one of the most powerful tools in your investing toolkit. The idea here is that as your money grows, and you reinvest your returns, you steadily keep increasing the amount of money on which you earn returns.
As a result, your returns keep getting bigger and your investments can start to grow exponentially. This phenomenon can also help mitigate inevitable losses.
💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
6. Leaving Emotions Out of It
Investing is just numbers and math, so it’s totally rational, right? Well…not exactly. Humans are emotional creatures and sometimes those emotions can get the better of us, leading us to make decisions that aren’t always in our best interest. Letting emotions dictate our investing behavior can result in costly mistakes, as behavioral finance studies have shown.
For example, if you’re investing in a recession and the stock market starts to drop, you may panic and be tempted to sell your stocks. However, doing so can actually lock in your losses and means that you miss the subsequent rally.
On the other end of the spectrum, when the stock market is roaring, you may be tempted to jump on the bandwagon and overbuy stocks. Yet, doing so opens you up to the risk that you are jumping on a bubble that may soon burst.
There are a number of strategies that can help these mistakes be avoided. First, fight the urge to check how your investments are doing all the time. There are natural cycles of ups and downs that can happen even on a daily basis. These can cause anxiety if you pay attention too closely. You might want to avoid constant checking in and instead keep your eye on the big picture — achieving your long-term goals.
Trust your asset allocation. Remember that your asset mix has already taken your goals, time horizon, and your risk tolerance into consideration. Tinkering with it based on spur-of-the-moment decisions can throw off your allocation and make it difficult to achieve your goals.
7. Reducing Fees and Taxes
Be wary of taxes and fees as these can take a hefty bite out of your potential earnings over time. Also, many investment fees are expressed as a small percentage (e.g. less than 1% of the money you have invested) that may seem negligible — but it’s not.
Also, many investment costs can be hard to find, and thus hard to track. Meanwhile, various expenses can add up over time, reducing your overall gains.
Expense ratios
To cover the cost of management, mutual funds and exchange-traded funds charge an expense ratio — a percentage of the total assets invested in the fund each year. An actively managed mutual fund might charge 1.0% or more. A passively managed ETF or index fund may charge 0.50% or less. So you may want to choose mutual funds with the lowest expense ratios, or you may consider passive ETFs or index funds that charge very low fees.
The expense ratio is deducted directly from your returns. You may also encounter annual fees, custodian fees, and other expenses.
Advisory fees
You can also be charged fees for buying and selling assets as well as commissions that are paid to brokers and/or financial advisors for their services. It’s important to manage these costs as well. One of the best lines of defense is doing your research to understand what fees you will be charged and what your alternatives are.
8. Taking Advantage of Tax-Advantaged Accounts
There are a few long-term goals that the government wants you to save for, including higher education and retirement. As a result, the government offers special tax-advantaged accounts to help you achieve these goals.
Saving for Education
A 529 savings plan can help you save for your child’s — or anyone’s — college or grad school tuition. Contributions can be made to these accounts with after-tax dollars. This money can be invested inside the account where it grows tax-free. You can then make tax-free withdrawals to cover your child’s qualified education expenses.
Saving for Retirement
Your employer may offer you a 401(k) retirement account through your job. These accounts allow pre-tax dollars to be contributed, which lower your taxable income and can grow tax-deferred inside the account. If your employer offers matching funds, you could try to contribute enough to receive the maximum match. When you withdraw money from your 401(k) at age 59 ½, it is subject to income tax.
You may also take advantage of traditional IRAs and Roth IRAs. Traditional IRAs use pre-tax dollars and allow tax-deferred growth inside your account. Withdrawals at age 59 ½ are subject to income tax.
You fund Roth IRAs, on the other hand, with after-tax dollars, so money in your account grows tax-free, and withdrawals are not subject to income tax.
There are other tax-advantaged accounts that can work favorably for long-term investors, including SEP IRAs for self-employed people, and health savings accounts (or HSAs), in addition to other options.
9. Making Saving Automatic
One way to continually add to your investments is by making saving a regular activity. One easy way to do this is through automation. If you have a workplace retirement account, you can usually automate contributions through your employer.
Or if you’re saving in a brokerage account you can arrange with your broker for a fixed amount of money to be transferred to your brokerage account each month and invested according to your predetermined allocation.
Automation can take the burden off of you to remember to invest. And with the money automatically flowing from your bank account to your investments accounts, you probably won’t be as tempted to spend it on other things.
10. Checking In on Your Investments
You may want to periodically check in on your portfolio to make sure your asset allocation is still on track. If it’s not, it may be time to rebalance your portfolio. You may want to rebalance when the proportion of any particular asset shifts by 5% or more.
This could occur, for example, if the stock market does really well over a given period, upping the portion of your portfolio taken up by stocks.
If this is the case, you might consider selling some stocks and purchasing bonds to bring your portfolio back in line with your goals. Periodic check-ins can also provide opportunities to examine fees and other costs (like taxes) and their impact on your portfolio.
What Is Long-Term Investing?
A long-term investment is an asset that’s expected to generate income or appreciate in value over a longer time period, typically five years or more. Long-term investments often gain value slowly, weathering short- to medium-term fluctuations in the market, and (ideally) coming out ahead over time.
Short-term investments are those that can be converted to cash in a few weeks or months — but they’re generally held for less than five years. Many investors trade these assets in short periods, like days, weeks, and months, to profit from short-term price movements.
However, a short-term investing strategy can be risky and volatile, resulting in losses in a short period.
💡 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.
Long-term Investments and Taxes
It’s also worth noting that for tax purposes the Internal Revenue Service (IRS) considers long-term investments to be investments held for more than a year. This is another important consideration when developing a longer-term strategy.
Investments sold after more than a year are subject to the long-term capital gains rate, which is equal to 0%, 15%, or 20%, depending on an investor’s income and the type of investment. The long-term capital gains rate is typically much lower than their income tax rate, which can help incentivize investors to hang on to their investments over the long run.
Long-term investing can be beneficial for the three reasons noted above:
• Holding investments long term can allow certain securities to weather market fluctuations and, ideally, still see some gains over time. While there are no guarantees, and being a long-term investor doesn’t mean you’re immune to all risks, this strategy may help your portfolio recover from periods of volatility and continue to gain value.
• In the case of bigger financial goals, e.g. saving for retirement or for college tuition, embracing a long-term investment plan may help your savings to grow and better enable you to reach those larger goals.
• Last, there may be tax benefits to holding onto your investments for a longer period of time.
The most important tips for long-term investing involve setting financial goals; understanding your time horizon and risk tolerance; diversifying your holdings; minimizing taxes and fees; and starting early so your portfolio can benefit from compounding; and understanding how tax-advantaged accounts can be part of a long-term plan.
When you’re ready to invest, whether through retirement accounts, brokerage accounts, by yourself, or with help, these strategies can help you build an investment plan to match your financial situation.
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
What is a realistic long-term investment return?
The average historical return of the U.S. stock market is about 10%, but that’s an average over about a century. Different years had higher or lower returns. So asking what a realistic long-term investment return is hard to gauge, and it will ultimately depend on the investments you choose, how long you hold them, as well as the fees and taxes you pay.
Where is the safest place to invest long-term?
All investments come with some degree of risk, but a more secure way to invest for the long term might be with fixed-income securities like bonds, which pay a set return over a period of time. Money market accounts and certificates of deposit (CDs) generally also have fixed rates. But remember that the lower the risk, the lower the return.
What is the biggest threat to long-term investments
Long-term investments, like all investments, are vulnerable to market changes. Even when investing for the long haul, it’s possible to lose money. Another threat is the risk of inflation. As inflation rises, your money doesn’t go as far. So even if you save and invest for decades, inflation is also rising at the same time, and your money may have less purchasing power than you expected.
Photo credit: iStock/Pekic
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
On top of sorting out whether you’re eligible for federal student loans and the difference between subsidized and unsubsidized loans, you may be wondering how student loans may impact your taxes and whether student loans count as income. In a nutshell, the answer is no, student loans are debt, and do not count as income.
Fellowships and other forms of financial grants, however, may be counted as income, depending on how the funds are spent. And loans that are forgiven have counted as income.
Read on for more about the tax implications of student loans, grants, and student loan repayment. Of course, this is just a helpful guide as you begin to explore the basics of student loans and taxes; always seek out a tax professional to help you with your specific situation.
Are Student Loans Taxable?
There are multiple types of student loans — each with their own unique terms. As noted earlier, though, student loans are not taxed as income.
This is true of other types of loans generally as well, like credit card spending, mortgages, and personal loans (unless the loan is forgiven) — basically most credit that needs to be repaid. The IRS considers student loans a form of debt — not income — therefore, it is not taxed.
The only time that student loans (or other types of debt) can be taxed is if they are forgiven during repayment. If you are eligible for a federal student loan forgiveness program and have met the requirements (which vary, and may include stipulations like making eligible payments for 20 to 25 years via an income-driven repayment plan or completing eligible public service work/payment requirements, and others), the remaining balance on your student loans (the amount forgiven) may be taxed as income, depending on the repayment plan. This could amount to a hefty tax bill.
Are Scholarships Taxable?
The high-level answer to this question is: it depends. There are many different forms of scholarships, grants, and fellowships that are awarded to students to cover the costs of studying and research. Some are need-based and some are merit-based. The basic difference between scholarships and loans is that a scholarship is given while a loan is borrowed. You won’t typically have to pay back a scholarship, but you do have to pay back a loan.
Most scholarships are not taxed when you are enrolled in a formal educational institution and the scholarship is directly used to cover the costs of tuition, fees, books, and supplies used for study.
There are some situations in which scholarships can be taxed, however. For instance, a scholarship can be taxed as income if you use it to cover what are considered “incidental” expenses related to your education such as travel, room and board, and supplementary equipment and supplies.
Another type of scholarship that can be taxed is a scholarship that has a service-related requirement to it. This frequently applies to scholarships for graduate students. If you are required to teach, provide research assistance, or perform other services as a condition of your scholarship, it can be taxed as income and you will be required to report the scholarship as part of your gross income.
(For more about which types of scholarships are considered income and what scholarship-related activities are taxable, check out IRS Publication 970 .)
Student loans aren’t usually taxable as income, and in fact, may come with a tax benefit that is meant to make repayment a little easier on borrowers investing in their education.
The Student Loan Interest Deduction allows you to deduct the amount of interest you paid on both federal and private student loans, up to a maximum of $2,500 per year. In order to be eligible to deduct the full amount, your modified adjusted gross income (AGI) must be $70,000 or less (or $145,000 for married couples filing jointly). The amount you’re allowed to deduct is gradually reduced if your modified AGI is more $70,000 but less than $85,000 (or more than $145,000 but less than $175,000 for married couples filing jointly. Income above these thresholds renders you ineligible for the deduction.
As a tax deduction, the amount deducted helps to lower your overall taxable income, potentially resulting in a lower tax bill or higher tax refund. This deduction can also help defray some of your repayment costs.
Are Employer Student Loan Payments Taxable?
An increasingly popular benefit offered in some workplaces is help with education costs and student loan repayment. Employers such as Aetna, Fidelity Investments, Google, and more offer student loan assistance programs to employees.
Currently, employers are allowed to contribute up to $5,250 toward employees’ qualified education costs tax-free. Payments or reimbursements above that amount are considered taxable income for the employee. It’s important to note that this special tax treatment is temporary, however, and expires December 31, 2025. After this date, the full amount of any employer contributions toward education expenses or student loan repayment will be taxed as income.
How Can I Make My Student Loan Repayment Easier?
The cost of a student loan comes in the form of the interest you pay each month on the balance owed. Consider this example: Say you have a $30,000 loan with a 7% interest rate. On the 10-year Standard Repayment Plan, you would pay roughly $11,800 in interest in addition to repaying the $30,000 principal.
So what can make repayment easier, other than the student loan interest deduction? One option is to refinance your student loans with a private lender.
If you already have private and/or federal student loans, you may be able to refinance your student loans at a lower interest rate than you currently are paying. If you are eligible to refinance your student loans, you could shorten your term length, qualify to lower the interest rate on your loans, or possibly lower your monthly payment (by extending your term). But you may pay more interest over the life of the loan if you refinance with an extended term.
There are other potential drawbacks to think about. For instance, federal student loans come with several benefits and protections such as forbearance, deferment, income-driven repayment plans, and certain forgiveness programs that private loans do not offer. If you think you might need some of these benefits, or if you are eligible for student loan forgiveness, it might not be the right time to refinance.
However, if you have a steady income and good cash flow — along with other aspects of your financial picture that are appealing to a lender — and you are ready to focus on paying down your loans, refinancing might be the right solution for you.
SoFi is a leader in the student loan space, offering refinancing options to help you save on the loans you already have.
The Takeaway
Generally, student loans are not considered income, so they are not taxed. The exception is when some or all of your student loan balance is forgiven. In some cases, the IRS may count the canceled debt as taxable income.
Educational grants and scholarships, on the other hand, may or may not count as income. Typically, they are taxed when they are spent on expenses outside of tuition and fees, such as room and board and travel.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The buy side and sell side are two fundamental aspects of the financial markets. As it sounds the buy side refers to investment companies (including pension funds, hedge funds, money managers) that buy securities for their clients. The sell side is involved in the creation, selling, or issuing of the securities that the buy side then purchases.
Within the buy side and sell side there are different roles and dynamics at play.
Buy Side vs Sell Side: Key Differences
Buy side and sell side are like two faces of the financial and capital markets coin, but there are some key differences between the two.
Buy Side
Sell Side
Buy-siders do their own research, but their reports are proprietary and only available to buy-side clients.
Sell-siders do their own research and reports and make them publicly available.
Buy-side research analysts tend to build a list of sell-side analysts in relevant sectors from which to get reports, technical analysis, and information they rely on.
Sell-side analysts dig deep in their research, get narrow in their focus, and typically develop an area of strong expertise.
What Is the Buy Side?
The buy side is the part of the capital market that buys and invests large quantities of securities as part of money management and/or fund management. On the buy side, professionals and investors invest in securities, including common shares, preferred shares, bonds, derivatives, and other products that are sold — or issued — by the sell side.
Think of the buy side as the firms that purchase investment securities for their own funds or accounts or for investors.
For instance, a fund management or asset management firm might run a fund or set of funds. Naturally, they look for assets that match the fund’s objectives. A buy-side portfolio manager might learn of a new tech product that sounds promising. After doing research on the company and determining whether it was a wise investment, the PM might purchase shares of that company.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
What Is the Role of a Buy-Side Analyst?
Both the buy side and the sell side employ ranks of analysts that in some ways do similar work — but with different aims.
Buy-side analysts do extensive research before recommending whether their firm should purchase a certain security. The goal of a buy-side analyst is to be right as often as possible — because being correct corresponds to profit for their firm and their clients.
In addition to gathering their own information and conducting analysis on a given sector, buy-side analysts get to know the best analysts on the sell side whose research is relevant and reliable.
The relationship between buy-side and sell-side analysts can be seen as mutually beneficial. The more trustworthy a sell-side analyst’s research is, the more likely the buy-sider will be to recommend purchasing securities from the sell-side firm. Thus the buy-side indirectly plays into the sell-side’s compensation.
Buy-Side Goals
The goal of the buy side is to beat their benchmark indexes, and generate financial returns for clients.
Buy-siders put capital to work. They typically have a pool of funds they use to invest in securities. Professionals on the buy side typically work in portfolio management, wealth management, private equity, hedge funds and sometimes venture capital. Buy-side companies work to identify and buy underpriced, undervalued, or high-potential securities for clients in order to make the highest profit on their trades.
Buy-side investors can place large-scale transactions to keep trading costs low. They also have access to a wide variety of trading resources to help them identify, analyze, and quickly make a move on investment opportunities, often in real time. Buy siders must disclose their holdings in a document called a 13F, and this information is available publicly each quarter.
What Happens on the Buy Side
The role of the buy side is to:
• Make decisions about investments (whether to buy, sell, or hold securities)
• Do research on investment opportunities
• Recruit investors and their capital
• Conduct valuations and financial modeling
• Get the best return on capital in order to grow assets under management
What Is the Sell Side?
The sell side of finance deals with creating, promoting, and selling securities that can be traded to the public. The sell side handles all activities related to selling securities to the buy side. That can include underwriting for initial public offerings (IPOs), providing clearing services, and developing research materials and analysis.
Professionals on the sell side represent companies or entities that need to raise money. They do it by selling or issuing securities. The sell side is made up primarily of advisory firms, banks, or other kinds of companies that facilitate selling of securities for their client companies.
What Happens on the Sell Side
The role of the sell side is to:
• Advise corporate clients on large transactions and financial decisions
• Help clients raise capital, be it debt or equity
• Provide research on listed companies (called equity research)
• Conduct valuations and financial modeling
• Create liquidity for securities that are listed
Sell siders keep close track of the performance of specific companies they track, keep track of stocks, and model and project future financial performance and trends. They come up with research recommendations and target prices and sell ideas to clients.
Sell siders spend a lot of time analyzing balance sheets, quarterly results, and any other data they can find on a company. Sell-side analysts aim to give deeper insights into trends and projections; they issue reports and recommendations which are used to make investment decisions for clients.
Professionals focused on the sell side often have jobs in investment banking, sales and trading, equity research, market making, and commercial or corporate banking.
What Is the Role of a Sell-Side Analyst?
The job of a sell-side analyst is to vet different stocks or other assets and sell them to the buy side. In that sense, sell-siders are an essential part of the marketing of different securities.
Typically a sell-side company employs many analysts who help shape the security offerings across sectors and industries. An analyst who covers a certain sector goes deep in that area, talking to a range of people who are knowledgeable about each company and its products — including customers, suppliers, competitors — and building models that help assess a company’s status.
Sell-side analysts are the ones who rate a company’s stock as buy, sell, or hold. It’s generally taken as an evaluation of the stock’s performance rather than the company’s.
An analyst’s success hinges to a large degree on their access to the best and most useful information about a stock, its price target, and their estimates about the stock’s performance. Taken together, the estimates of different analyses are sometimes called the consensus estimate. That’s how buy-siders evaluate the merits of different securities and whether to buy.
Sell-Side Goals
Sell-side companies make money through fees and commissions earned when they sell — which means the more deals they make, the more buy-side firms earn. Market making firms are part of the sell side and help provide the liquidity the market needs to make transactions happen.
Investment banks tend to dominate the sell side of the financial markets; they underwrite stock issuances, sell to institutions and individuals and take proprietary positions in securities.
The most high-profile sell side activity is underwriting IPOs, acting as a buffer between companies going public and the investing public set to buy IPO shares.
How Do the Buy Side and Sell Side Earn a Profit?
Because buy-side firms raise money from wealthy investors and institutions and invest on their behalf, buy-siders profit from management and/or performance fees.
Meanwhile, sell-side firms earn money from the commissions they get from facilitating deals, and from marketing, selling and trading securities.
The Takeaway
The capital market is made up of the buy side and the sell side. Whereas the buy side aims to get the best value from investments in order to bring in greater returns for clients, the sell side aims to help clients raise capital through the sale of securities.
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
Is the buy side more lucrative than the sell side?
Careers on the buy side are generally considered higher paying than on the sell side. This is in part due to the amount of risk a buy sider takes on when selecting securities, and the premium placed on making a profit.
Do people move from the buy side to the sell side?
People do move from one side to another, but the more common transition is from the sell side to the buy side, owing to the allure of higher compensation and in some cases better hours.
Are traders on the buy or sell-side?
Traders are on the sell side. Traders are considered market makers in that they provide liquidity in the markets.
Phot credit: iStock/filadendron
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Yes, you can refinance student loans with a private lender more than once in the quest for a lower interest rate and different repayment term.
How Many Times Can You Refinance Student Loans?
If you’re a graduate who has the credit score and income to qualify, you can refinance your student loans as many times as you’d like. In fact, some folks refinance multiple times.
But before you get too refi-happy, it’s important to know the advantages and disadvantages of this strategy.
What Are Some Advantages of Refinancing Multiple Times?
One of the biggest advantages of refinancing your student loans is that you may be able to qualify for a lower interest rate, whether you refinance once or several times. A reduced rate can help you save money in the long run.
For example, let’s say you’ve been paying down an older federal Grad PLUS loan that currently has a balance of $40,000 and an interest rate of 7.90%. You have 10 years of payments left, which are currently $483.20 per month.
You have good credit and qualify for a seven-year, fixed refinance rate of 6%. If you were to go through with the refinance, you’d actually increase your monthly payment by about $100. However, you’d save about $8,900 in total interest.
Later on, you might qualify for a lower fixed rate or an even lower variable rate, and so on.
Or you might find it helpful to refinance to a longer term, with lower monthly payments. That will likely mean paying more in interest over the life of the loan, but lower monthly payments may put you in a better position to accomplish your short-term financial goals.
Reputable lenders charge no application or origination fees, so refinancing each time will not cost you anything.
What Are Some Disadvantages of Refinancing Multiple Times?
One disadvantage of refinancing your student loans is that your credit score could temporarily drop by a few points. Whenever you apply for a loan, the lender performs a hard credit inquiry. One or two inquiries usually have a small and temporary impact on your score. However, too many hard inquiries within a short time frame could cause some damage. The good news is that many student loan refinancing lenders allow you to shop for rates and get quotes online using a soft credit pull, which has no impact on your score.
Another factor to consider is your time. Though you can refinance as many times as you want, it helps to make sure it’s worth the effort. That means researching reputable lenders and the rates and terms they offer.
It’s important to point out that refinancing federal student loans even once will cause you to permanently forfeit government-backed protections and benefits, such as federal student loan forgiveness programs, deferment, and forbearance.
How Is Student Loan Refinancing Different Than Consolidation?
It’s important to make a distinction between refinancing and consolidation. When you refinance your student loans with a private lender, you are borrowing one new loan with new terms, such as a lower interest rate or different repayment term, and using the proceeds to pay off your existing loans.
When you consolidate federal student loans into a Direct Consolidation Loan, you combine your existing loans into one. The term may be drawn out to up to 30 years, and the interest rate will be the weighted average of the original loans’ rates, rounded up to the nearest eighth of a percentage point. For this reason, your new rate may actually be higher than the rate of your previous lowest-interest loan.
Things to Look for When Refinancing
Whether you refinance your student loans for the first or sixth time, it would be smart to check that your new rate and term make sense for you.
You’ll encounter fixed-rate and variable-rate loans. Fixed-rate loans have one set interest rate that does not change over the life of the loan. The rates on fixed-rate student loans are typically higher than the initial rates of variable-rate loans. However, because the rate never changes, it can make budgeting easier.
Variable-rate loans have interest rates that start off lower, but can fluctuate based on the prime rate or another index. Rates can climb if the rate or index they are tied to goes up (and vice versa).
Variable-rate loans might be a good choice for shorter-term loans. The longer the loan term, the bigger the chance of a rate hike.
Also, beware of qualifying for a low interest rate that’s attached to a longer-term loan. Though monthly payments might be low, a longer term might mean you’ll end up paying much more in interest over the life of the loan. If you can afford the higher monthly payment, loans with shorter terms can be a good cost-saving option.
Consider looking for a refinance lender that offers competitive rates and flexibility in choosing the repayment term. And if you want to refinance both federal and private student loans into one new loan, look for a lender that does that.
Serious savings. You could save thousands of dollars.
We offer flexible terms and low fixed or variable rates.
Refinancing Your Student Loans More Than Once
It’s all about the great rate chase.
Having a low debt-to-income ratio can help you qualify for a lower interest rate. So if you have a higher salary, get a big bonus, or pay off other debts, your debt-to-income ratio might improve.
Similarly, if your credit score increases, you typically become more attractive to lenders. This could happen if you are using a small amount of your available credit, or if you find and correct a mistake on one of your credit reports. (Do student loans affect your credit score? Continuous on-time payments may have a positive effect.)
Married couples may want to consider refinancing student loans together to put the power of two earners to use. A solid cosigner could also be brought aboard.
If you’re thinking about a refinance, it could help to keep an eye on the federal funds rate, which is the rate banks charge one another for overnight loans. When the Federal Reserve raises or lowers short-term interest rates, private lenders respond in turn. (This does not apply to federal student loans, whose interest rates have been set by Congress once a year since 2006.)
Even if interest rates rise now, they could still be considered low by historical standards.
Refinancing Your Student Loans With SoFi
Is it bad to refinance multiple times? If it saves you money, that’s nothing but a good thing. Refinancing won’t be the right move for all people, but everyone should know the rates they’re paying, their total student debt load, and their repayment strategy.
SoFi is a leader in refinancing student loans, with low fixed or variable rates and flexible loan terms.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.
FAQ
Can I consolidate student loans more than once?
You can consolidate federal student loans into a Direct Consolidation Loan more than once only if you have federal loans that were not included in a previous consolidation, or if you previously consolidated loans under the Federal Family Education Loan (FFEL) consolidation program. Remember that consolidation does not lower your loan rate.
How many times can you refinance a loan?
As many times as you qualify to do so.
How many times can you take out student loans?
When it comes to federal student loans, there is no time limit on how long a borrower can receive Direct Unsubsidized Loans or Direct PLUS loans, but annual and aggregate limits for Direct Unsubsidized Loans apply.
Private student loans, for which you must qualify or have a cosigner, usually have an annual limit equal to an institution’s cost of attendance minus other financial aid. Most have aggregate loan limits for undergraduate and graduate students.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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.
