Jun
10
2025
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ETFs vs Mutual Funds: Learning the Difference

By | Growing Wealth, invest, Investing | No Comments

Exchange-traded funds (ETFs) and mutual funds are both SEC-registered investment vehicles that offer investors a convenient way to build a diversified portfolio. Both are professionally managed and offer investors slices of the portfolio. Both can hold hundreds or thousands of securities. Both are not FDIC insured, which means an investor can lose their money.

For decades, ETFs and mutual funds have provided retail and institutional investors an efficient way to invest in stocks, bonds and other asset classes. Yet there are key differences.

Key Points

•   ETFs trade on exchanges throughout the day, while mutual funds transact once daily at the closing price.

•   ETFs disclose holdings daily, whereas mutual funds report total value daily.

•   ETFs usually have lower fees compared to mutual funds, which may have higher fees.

•   ETFs typically require a lower initial investment, mutual funds often need a higher initial investment.

•   ETFs are generally more tax-efficient due to the unique structure of these funds.

Differences Between ETFs and Mutual Funds

While there are plenty of similarities between ETFs and mutual funds, let’s start with some key differences.

How to Buy Mutual Funds and ETFs

The biggest difference between mutual funds and ETFs is how they’re purchased and sold. Mutual funds transact once per day, with all investors selling or buying shares at the same closing price. ETFs trade throughout the day on public exchanges, with many shares exchanging hands at various prices as buyers and sellers react to changes in the market.

Data on Holdings

Mutual funds are required to report the total value of their portfolio once per day after the stock markets close. The fund then figures out how many shares they have and what each share is worth based on the total value. This is what is referred to in the industry as the Net Asset Value, or NAV. When investors buy or sell a share of the mutual fund, they transact at that NAV at the end of the day.

Meanwhile, ETFs have to report their holdings on a daily basis. The price of the ETF fluctuates throughout the day based on market conditions and the value of the ETF’s underlying holdings.

Passive vs Active

ETFs tend to be considered “passive investments.” That’s because investors are not necessarily making active trades but rather tracking an underlying index. However, actively managed ETFs have also cropped up, since the first ETF was launched in 1993.

Meanwhile, with mutual funds, it’s common to find an active fund manager who makes decisions on which holdings to buy and sell.

Fee Differences Between ETFs vs Mutual Funds

Mutual funds tend to charge different types of fees to cover their business costs. ETFs generally charge lower fees. Compared to active investing, passive investing usually incurs lower fees since they track a particular index, like the S&P 500 Index.

Tax Implications of ETFs vs Mutual Funds

You may get better tax efficiency with ETFs, because you are not buying or selling as much with them. There are fewer transactions to tax and ETFs are generally tax efficient given their unique creation and redemption mechanism that they employ.

You’ll have to pay capital gains taxes and dividend income taxes, but ETFs have a lower tax requirement than mutual funds. Due to the unique structure of ETFs, they’re often able to reduce the amount of capital gains they distribute each year relative to a comparable mutual fund.

Lower Initial Investment

As a general rule, mutual funds tend to require a higher initial investment. ETFs, on the other hand, allow investors to invest in as little as a single share. In some cases, brokerage firms allow investors to even buy ETF fractional shares, slices of a whole stock in an ETF.

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Types of Mutual Funds

The first mutual fund was launched in the 1970s by the late Jack Bogle of Vanguard. Since then the investment type has steadily increased in popularity. They account for tens of trillions of dollars.

Here are some of the different types of mutual funds:

Load Mutual Funds

Load mutual funds charge a sales commission that’s paid to a financial professional or broker who helped the investor decide on which mutual fund to purchase.

There are typically two types of load mutual funds: Front-end load funds, which means the fee is paid when the mutual fund is purchased, and back-end load funds, which means the fee is paid when the mutual fund purchase is redeemed. Generally, back-end load funds charge higher fees.

No-Load Mutual Funds

Investors could look for a “no-load” mutual fund, which means the shares are bought and sold without charging commissions.

This plan may be best for investors who plan to do a lot of trading. If investors have to pay a commission charge every time they buy or sell a security, frequent trading will reduce returns. However, the expense ratios for no-load mutual funds are often higher.

Active vs Passive Mutual Funds

Most mutual funds are actively navigated by experienced money managers who steer the fund and invest in companies they believe will lead to outperformance. However, there are also passive mutual funds that track indices, similar to the way ETFs do.

Open-Ended Funds

Purchases and sales of fund shares typically happen directly between an investor and the fund company. As more investors buy into the fund, more shares are added, which means that the number of eventual fund shares can be nearly unlimited.

However, the fund must undergo a daily valuation by law, which is called marking to market (see a deeper dive on this below). The result of this process is a new per-share price, which has been adjusted to sync with any changes in the value of the fund’s holdings. An investor’s share value is not affected by the quantity of outstanding shares.

Closed-End Funds

Unlike open-ended funds, closed-ended funds (CEFs) are finite and limited. Only a specific number of shares are issued and no further shares are expected to be added.

The prices of close-ended funds are influenced by the NAV of the fund, but are ultimately determined by the demand investors have for the fund. Since the amount of shares is fixed, the shares often trade above or below the NAV. If the fund is trading above the NAV (what it’s really worth), it’s said to be trading at a premium; if trading below the NAV, it’s said to be trading at a discount.


💡 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.

Different Types of ETFs

ETFs are just one class of funds within the broader exchange-traded product (ETP) universe. Here’s a closer look at the different types of ETPs and ETFs.

Exchange-Traded Notes (ETNs)

Exchange-traded notes (ETNs) are usually debt instruments issued by banks that seek to track an index.

Leveraged ETFs

Leveraged ETFs use derivatives to amplify returns from a fund. For instance, if an underlying index moves 1% on a trading day, a regular ETF tracking the index would also move 1%. However, a leveraged ETF could move 2% or 3% depending on whether it’s double levered or triple levered.

Inverse ETFs

Inverse ETFs are similar to shorting a stock. Investors can use inverse ETFs to bet that the price of a market or stock sector will go down. So if the underlying goes down 1% on a given day, the inverse ETF will go up 1%.

Thematic ETFs

Thematic ETFs tend to focus on a slice of the stock market and follow a specific trend. Thematic ETFs that have cropped in recent years include those that cover renewable energy, the gig economy, or even pet care.

The major pros and cons of thematic ETFs include capturing a specific trend that appeals to an investor, as well as being too narrowly focused.

The Takeaway

Both ETFs and mutual funds allow investors to pool funds with other investors’ funds to ultimately buy and sell baskets of securities in the market. The aim is portfolio diversification and reducing risk compared to investing in a single company. If a person were to put all of their money into one company instead, their investment isn’t diversified because their fortunes are tied to that single company.

Investing in both ETFs and mutual funds, or a combination of both (or either) will depend on an individual investor’s preferences. Not all investments are right for each portfolio, and some research is necessary to see what’s right for you.

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).

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

FAQ

How are mutual funds and ETFs bought and sold?

One of the biggest differences between mutual funds and ETFS is how they are traded. Mutual funds transact once per day, with all investors trading at the same closing price, while ETFs trade constantly throughout the day on public exchanges.

What are some common types of mutual funds?

There are numerous types of mutual funds, including (but not limited to) load mutual funds, no-load mutual funds, active or passive funds, open-ended funds, and more.

What are some common types of ETFs?

Some common types of ETFs include thematic ETFs, inverse ETFs, leveraged ETFs, and the similar-but-different exchange-traded notes, or ETNs.

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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.
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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.
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.


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.


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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
S&P 500 IndexThe 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.
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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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

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May
30
2025
How to Make Talking About Finances Fun, Not a Fight

How to Make Talking About Finances Fun, Not a Fight

By | Family Finances, invest, Life & Career | No Comments

Ask couples what they fight about most, and money is sure to be at the top of the list. Decades of research have shown that common clashes are sparked by different spending habits, different financial values (which influence spending habits), and how to raise financially smart kids.

While dealing with money isn’t always easy, it doesn’t have to drive a wedge in your relationship. These strategies can help ensure your financial discussions with your partner are productive and — dare we suggest — maybe even something to look forward to.

Key Points

•   Regular financial meetings should focus on life goals and values, not just money, to understand each other’s perspectives.

•   Create a safe, non-judgmental space for open financial conversations to build mutual respect.

•   Look for shared goals and points of agreement to build confidence and momentum in financial discussions.

•   Address financial topics as they naturally arise in daily life, using empathy and an open mind.

•   Reward yourselves for sticking to financial plans and achieving milestones to keep the process positive.

Meet Regularly — but Don’t Discuss Money

When couples fight about money, the classic mistake is to think that having a regular “money talk” will help solve things. Unlikely.

That’s because the source of most financial disagreements is that one person’s values don’t line up with the other’s. In order to truly ease money stress, you have to start by understanding the bigger wants and needs and priorities of your partner.

Make time to meet regularly and focus on things you both want out of life. It doesn’t have to be a long conversation — maybe 30 minutes, or an hour.

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Come Prepared

Consider bringing a list of topics to each meeting, but don’t expect to cover them all. There will be other meetings, and it’s more important to leave each conversation with a sense that you understand each other better. Depending on the stage of your relationship, you might raise some common questions:

Do you want kids? Do you want pets? Do you want to live a certain lifestyle? Start a business? Retire early? Send the kids to private school vs. public?

How important is it to have a vacation each year, or is it more important to have a beautiful home — or both?

Do you both believe in working hard and playing hard? Working to live or living to work? These may sound like cliches, but dig into each topic to get at each person’s core feelings.

Create a Safe Space

A key aspect of these non-money talks has to be a spirit of openness, not criticism or judgment. You’re trying to get to know one another in a slightly different way. Ask questions, take time to listen to each other’s answers.

While these sessions may seem uncomfortable at first, having these non-financial conversations may actually prevent important issues from causing conflicts or money fights in the future.

Again, keep these conversations fairly short. The idea is to find common ground, and that may not happen right away. So don’t expect to agree, expect to learn something new about your partner.

Look for Shared Goals and Points of Agreement

Even couples that fight about money, also agree on plenty of financial issues. Be sure to pay attention as you discover these points in common, and celebrate the fact that you have them.

Knowing that you have financial goals and priorities in common, not just pain points, can build your confidence and momentum and lead to the good part of all this: Having more fun because you’re not stressed about money squabbles!

Address Financial Topics as Organically as You Can

Rather than set up more meetings (who has time?), you can use your newfound empathy and sense of shared values to tackle topics as they come up naturally in your day-to-day lives.

Now you can talk about spending when you get the credit card bill, or when you have to make a tough choice between two competing priorities. In some ways it’s less stressful to discuss whether to refinance the house or set up a Roth IRA when that question comes up organically, rather than trying to anticipate bigger issues.

Be sure to include something fun in your financial plan. Money is for the future, and it’s also for the present, so make sure you enjoy it.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Let Go of Resentment

Financial inequity between partners — say, if one person has a lot of debt or there’s a large disparity between incomes — can be a common source of tension.

If you feel like one person’s debt is holding you both back, remember that it doesn’t have to last forever. There are many strategies for paying off debt — talking it through will help you find the right path for you both. You might also decide to meet with a financial advisor who can help you prioritize, create a budget, and perhaps even refinance to break even faster.

In cases of income disparity, it may help to reframe each partner’s contribution to the household. Yes, one person may bring in more (or all) of the household income, but be clear on the non-monetary intangibles that the other person is contributing. Cooking, cleaning, watching the kids, caring for aging relatives — these duties all add up and represent what each of you is bringing to the household.

Reward Yourselves

Create incentives to stick with your meeting schedule. Maybe that means taking your laptops to your favorite coffee shop, or treating yourselves to a movie night afterward.

Another idea is to reward yourselves as a couple after you hit a predetermined financial goal or milestone. For example, every month you successfully increase your emergency fund by a target amount, you might choose to enjoy a nice restaurant meal.

Even a free indulgence — like a walk around your favorite lake after the discussion — can be effective. Just make it something that you both enjoy (bonus points if it’s something that you don’t do all the time so it feels extra special). That way, you’ll look forward to it.

The Takeaway

The best way to take the sting out of discussing finances with your partner is to start by getting in sync as people, understanding each other’s values and perspectives. Scheduling time to talk monthly (or whatever cadence works for you) allows you to also savor the ways you are on the same page already, and what some of those shared goals are.

Don’t try to meet about big hairy financial goals that aren’t on the table yet. You do have to plan ahead, but it’s also important (and less stressful) to address money matters as they arise naturally. Then, get back to the fun of living your lives together the rest of the time.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

How do you talk about money in a relationship?

Talking about money in a relationship requires openness and honesty. Start by setting up a regular time to discuss your financial goals, values, and concerns. Create a safe space where both partners can share without judgment. Try to only use “I” statements to express your feelings and avoid blame. This approach helps build trust and ensures both partners are on the same page.

At what point in a relationship should you talk about money?

It’s best to talk about money early in a relationship, ideally before moving in together or becoming financially intertwined. This could be after a few months of dating or when the relationship feels serious. Discussing financial matters early helps prevent misunderstandings and builds a foundation of trust. It’s also wise to revisit the topic periodically as your relationship and financial situations evolve.

What is a financial red flag in a relationship?

A financial red flag in a relationship includes secretive behavior about money, excessive debt, or an unwillingness to discuss financial matters. Other signs include lying about spending, refusing to contribute to shared expenses, and having different financial goals without a plan to reconcile them. Recognizing these red flags early can help you address issues and maintain a healthy, transparent relationship.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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May
27
2025
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Contactless Payment: What You Need to Know

By | Budgeting & Goals, money | Comments Off on Contactless Payment: What You Need to Know

Contactless payment allows you to make a transaction simply by tapping or waving a contactless card or payment-enabled mobile device over a payment terminal. It’s simple, convenient, and growing in popularity: In a 2024 survey by the retail news outlet Chain Store Age, nearly half (46%) of U.S. respondents said they’ve used a form of contactless payment in the last seven days.

While contactless payments have a number of benefits, there are also a few drawbacks to this payment method. Read on for key things to know about contactless payments, including how they work, how to know if you can make a contactless payment, and the pros and cons of using tap-and-go technology.

Key Points

•   Contactless payment, or “tap to pay,” uses NFC technology for quick transactions.

•   Transactions are faster and more convenient than traditional methods.

•   Security is enhanced through encryption and tokenization.

•   Not all stores support contactless payments yet.

•   Transaction limits may apply due to lack of authentication.

How Do Contactless Payments Work?

Contactless payment, often called “tap to pay,” uses near-field communication (NFC) to let you pay by tapping or waving a card, phone, or smartwatch near a payment terminal. Both the payment device and the payment terminal have NFC chips that communicate wirelessly when close together. Instead of sending your actual card number, however, the system uses tokenization — replacing your number with a secure, random token. The token is transmitted to the payment processor, which contacts your bank to approve the transaction. If authorized, the payment is completed in seconds.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, transfers from one online bank account with SoFi.

What Transactions Are Eligible for Contactless Payment?

For contactless credit card payment to work, both the terminal and card have to have the technology.

Many credit cards and debit cards have built-in chips, but the chip that permits you to insert instead of swipe is not the same as a contactless card. To determine if your card is able to make contactless payments, look for the universal contactless symbol — a circle with a wave (or WiFi symbol turned on its side) inside — somewhere on the card. Contactless payments are also supported by devices using Apple Pay, Google Pay, or Samsung Wallet.

To determine if a payment terminal is contactless payment enabled, check for the universal contactless payments symbol with a hand next to it on the merchant’s electronic payment terminal, device, or card reader.

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Pros of Contactless Payment

Contactless payment comes with a number of advantages:

•   Ease of use. With contactless payment, users just have to tap their chosen payment method on the terminal. There’s no swiping or inserting for the transaction to go through.

•   Speed. Since there’s no swiping or inserting, contactless payments tend to be faster.

•   Leave the wallet at home. If you’ve uploaded your credit and debit card information to your mobile device, you can pay for things without carrying your physical wallet around.

•   Security. Contactless payment with chips is more secure than traditional magnetic-strip credit cards. Contactless payments are encrypted. This system makes it much harder for credit card scammers to steal people’s credit card information.

•   Hygiene. Contactless payment minimizes contact with shared surfaces, reducing the potential for germ transmission.

Overall, contactless payment may make for faster transactions, and might not even require you to pull out your wallet.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Cons of Contactless Payment

However, just like mobile banking has pros and cons, contactless payments do have some drawbacks, including:

•   Glitches in technology. A card and point-of-sale system might not line up from time to time, resulting in glitches.

•   It’s not available everywhere. While contactless payment is being adopted more and more, not every store has it. If there’s no symbol, customers will have to insert or even swipe to pay.

•   Potential security concerns. Contactless payments do not require a PIN or signature to authorize. As a result, lost or stolen contactless cards can be used to make fraudulent transactions.

•   Limited transactions. It largely depends on bank policies, but because tap to pay doesn’t require authentication, there may be limits on withdrawals and purchase amounts. For more details on transaction limits, contact your bank or credit card company.

Recommended: Guide to Keeping Your Bank Account Safe Online

The Takeaway

While contactless payment isn’t foolproof, it can make purchasing transactions faster, easier, and more convenient. It’s also becoming commonplace as a payment method, and it’s more secure than cards with magnetic stripes. You can weigh the pros and cons of contactless payment to determine if it’s right for you.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What are the pros and cons of using contactless payments?

In terms of pros, contactless payments are fast, convenient, and reduce physical contact, making them hygienic. They also offer enhanced security features like tokenization and encryption.
As for cons, contactless payments can lead to overspending due to the ease of use, and not all merchants accept them. Also, since contactless payments do not require a PIN or signature to authorize, a lost or stolen contactless card or device could potentially be used to make fraudulent transactions. Some users also experience technical issues or limited transaction amounts.

What is the purpose of contactless payment?

The purpose of contactless payment is to provide a quick, convenient, and secure way to make transactions without the need for physical cash or card swiping. Being able to tap a card or device on a reader streamlines the payment process, reduces wait times, and minimizes physical contact. Contactless payments also enhance the user experience and can improve transaction efficiency for businesses.

Why is contactless payment safer?

Contactless payments are safer because they use advanced security features like tokenization to protect your financial data. Tokenization replaces your card number with a unique digital token, making it difficult for hackers to use stolen information. Contactless payment also eliminates some of the opportunities for thieves to steal – or “skim” — your credit card information, since your card never comes into contact with the payment terminal.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.

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.

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23
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How to Start Investing: A Beginner’s Guide

By | Growing Wealth, Investing | No Comments

Investing can be a great way to secure your financial future, but it can also feel like an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a bank account.

But it’s important to understand what you’re doing before you put your money into the nebulous financial markets. You’ll want to know the basics of investing, from the different types of investments to the various strategies you can use to try to build your wealth. With this knowledge, you should have a good idea of what sorts of investments are right for you, and how to get started.

Key Points

•   Investing early can help you take advantage of compound returns, which may lead to financial growth over time.

•   Having a diverse investment portfolio may help mitigate volatility and risk when certain companies or sectors aren’t performing well.

•   Typically, your long-term financial goals, time horizon, and tolerance for risk help guide investment choices and portfolio asset allocations.

•   Regular investments, even in small amounts, may help build wealth over time.

•   Two common investment strategies for beginners include dollar-cost averaging and buy and hold.

•   Investing involves significant risk, and investors should research their investments to be better prepared for potential losses.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps to get up and running — just remember to do your homework first!

1. Determine Your Investment Goals

You’ll want to do your best to establish your financial goals before you start investing. Since investments have such strong growth potential over time, many people use their portfolio’s gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals, because they’re not the same for everyone.

2. Choose an Investment Account

You will also need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, mutual funds, and other securities.

You can also utilize an employer-sponsored retirement plan, like a 401(k), or an individual retirement account (IRA) – such as a Roth IRA – to make your investments. One benefit of some retirement investment accounts is that they are tax-advantaged, meaning your investments can grow tax-free within the accounts. However, you may need to pay taxes when withdrawing money from the account.

💡 Need more help? Follow our guide on how to open a brokerage account.

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

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

*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

3. Know Your Investment Options

There are numerous types of investment that you can explore and choose from. Here are some examples:

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly-traded company in units known as shares. Investing in stocks as a beginner — which may involve investing in and monitoring a small number of stable, low-risk companies — can be a good way to learn about the markets.

Investors might generate returns by investing in stocks through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may also pay dividends if it distributes part of its profits to its shareholders.

Note, however, that it’s possible that investors could lose their initial investment if a company’s share price hits zero. Investing in stocks carries some significant risks, and investors should be aware of those risks.

Recommended: How to Invest in Stocks: A Beginner’s Guide

2. Bonds

Bonds are loans you make to a company or a government — federal or local — for a fixed period. In return for loaning them money, they promise to pay you, the investor, periodic interest and, eventually, your principal at the end of the period.

Bonds are typically backed by the full faith and credit of the government or large companies. They’re often considered less risky investments than stocks.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns.

Recommended: How to Buy Bonds: A Guide for Beginners

3. Mutual Funds and ETFs

A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Exchange-traded funds (ETFs) are similar to mutual funds, but the main difference is that ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day.

Mutual funds and ETFs allow investors to diversify their holdings in one investment vehicle.

4. Real Estate

Real estate may be another type of investment, and many people initially invest in real estate by purchasing a home or a rental property.

If owning a home is out of reach for you, you can also invest in a real estate investment trust (REIT), or a company that operates in the real estate business. You can trade shares of a REIT on a stock exchange like you would a stock. With a REIT, an investor buys into a piece of a real estate venture, not the whole thing. If opting to invest in a REIT, there may be less responsibility and pressure on the shareholder when compared to purchasing an investment property.

4. Decide Your Investment Style

Each individual investor will have different goals and concerns as it relates to their portfolio. You may want to work with a financial professional to help you zero in on what type of investments and overall portfolio may give you the best shot at reaching your goals.

With that in mind, you’ll want to think about your style and investing habits, too. Consider your time frame, or time horizon – that is, how long you have to invest, and how long you might want to wait before selling your investments and reaping potential profits – assuming your investments accrued value.

Also think about your risk tolerance, or how much risk you’re willing to take with your portfolio. Riskier investments may generate larger returns over shorter periods of time, but they can also lead to significant losses. Again, this is something to think about when figuring out your specific investment style.

You’ll also want to think about how you allocate your investments, or the degree to which you diversify your portfolio. That means looking at the specific mix of investment types in your portfolio, and getting a sense of the risks and potential returns each brings to the fold.

Quick Tips for Investing Beginners

An investment strategy is a plan that outlines how you will invest your money. As noted, an ideal strategy should consider your financial goals, risk tolerance, and time horizon. Here are three recommended tips and strategies for beginner investors.

•   Consider a buy-and-hold approach: Investors practicing buy and hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which may boost overall portfolio returns.

•   Utilize dollar-cost averaging: Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price. A dollar-cost average strategy can help individuals access a lower average share price and help them avoid emotional investing.

•   Stay stoic: Remember to keep your emotions in check when investing. You may feel panicked every time the market dips, the economy slows, or a friend tells you that you need to shift your portfolio — it may be wise to stick to your strategy, keep your goals in mind, and let the chips fall where they may. There are no guarantees in investing, but don’t let the whims of the market give you whiplash.

Remember the Risks

It bears repeating: Investing involves risk. There are all sorts of risks that investors assume when they put their money in the markets, and each individual investment may have different types of associated risks. Some investment types are significantly riskier than others, too.

The important thing for beginner investors to keep in mind is that there are no guarantees when investing, and that there’s a chance they could see negative returns, or lose all of their initial investment.

The Takeaway

For beginners, investing can seem complicated and intimidating — in many ways, it is. But if you take some simple initial steps to familiarize yourself with the markets, investing tools, and types of investments — and pair them with a sound strategy – you should set yourself up to be more confident and comfortable when you start investing.

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).

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

FAQ

How much money do you need to start investing?

It’s possible to start investing with very little money. Some brokerages allow investors to open accounts with as little as $5, in some cases, depending on what types of investments you’re interested in buying. In some cases, all you need is $5 to start investing, but generally, the more you have, the better.

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.

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.
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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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May
23
2025
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Brokerage Accounts 101: Types & Benefits Explained

By | Growing Wealth, invest, Investing | No Comments

Brokerage accounts offer a way into the financial markets: think stocks, bonds, and other securities. Your account enables you to buy, sell, and trade these products. Not all brokerages operate the same way; nor do they all offer the same types of investments. We’ll break down what brokerage accounts are, the different account types available, and how they differ from other financial accounts.

Key Points

•   Brokerage accounts allow individuals to buy and sell securities.

•   Cash brokerage accounts allow trading securities using only deposited cash.

•   Margin accounts offer the ability to borrow for trading, increasing both leverage and risk.

•   Joint accounts are typically used by partners or family members for shared investments.

•   Discretionary accounts enable brokers to make investment decisions on behalf of the holder.

What Is a Brokerage Account?

A brokerage account is a type of investing tool offered by investment firms. These accounts allow people to invest their money by buying and selling stocks, bonds, exchange-traded funds (ETFs), and other types of securities.

These accounts are typically flexible and come in various forms, catering to different needs and experience levels. For prospective investors, knowing what a brokerage account is and how they work is important. For seasoned investors, learning even more about them can help deepen their knowledge, too.

What Is a Brokerage Account Used For?

Brokerage accounts open up the world of online investing or investing through a broker in stocks and allows investors to conduct other transactions, such as options trading. They are offered by different types of financial firms as well. Here’s a breakdown of different brokerage accounts, and what each might be used for:

•   Full-service brokerage firms usually provide a variety of financial services, including allowing you to trade securities. Full-service firms will sometimes provide financial insights and automated investing to customers.

•   Discount brokerage firms don’t usually provide additional financial consulting or planning services. Thanks to their pared-down services, a discount brokerage firm often offers lower fees than a full-service firm.

•   Online brokerage firms provide brokerage accounts via the internet, although some also have brick and mortar locations. Online brokers often offer some of the lowest fees and give investors freedom to trade online with ease. They also tend to make information and research available to consumers.

You can start the application either online or in-person. You can then fund your account by transferring money from a checking or savings account.

Some brokerage firms require investors to use cash to open their accounts, and to ensure they have sufficient funding to cover the cost of their investments (as well as any commission fees). Some do not require an initial deposit, however.

Brokerage accounts generally do not have restrictions on deposit or withdrawals. This makes them different from retirement accounts, which typically have more transaction limits or restrictions. Investors do need to claim any profits that they withdraw from their account as taxable income.

Here’s a closer look at how brokerage firm accounts differ from other types of money accounts.


💡 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.

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

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

*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Brokerage Accounts vs Checking Accounts

Brokerage accounts and checking accounts have one key similarity: both can hold cash. Brokerage accounts will often “sweep” your cash holdings into a money market fund that’s managed by that same brokerage, so that it may potentially earn interest.

Brokerage accounts are different from checking and savings accounts because of how your money is protected. Most checking accounts offered by a bank will come with Federal Deposit Insurance Corporation (FDIC) protection. FDIC insurance protects the first $250,000 per depositor, per bank, per account type.

For example, if you have a checking and a savings account at the same insured bank, the combined balances are covered up to $250,000. If you hold accounts that fall under different ownership categories (e.g., a joint checking account), those accounts may be covered separately, and be insured up to its own $250,000 total.

Brokerage accounts, on the other hand, are often protected by Securities Investors Protection Corporation (SIPC) insurance. The SIPC safeguards customers against losses caused by brokers becoming insolvent. They ensure the return of cash and securities, up to $500,000 (including $250,000 for cash). They do not cover losses due to market fluctuations or investment decisions, however.

Benefits of Having a Brokerage Account


The biggest benefit of a brokerage account is the opportunity to invest. Although a money market account could accrue interest, its funds are designed to be invested rather than held. These accounts come with other advantages as well.

•   Flexibility and control: Brokerage accounts allow owners to trade financial securities and invest their money as they see fit.

•   Potential for returns: You may be able to realize gains that are greater than current interest rates. However, they also run the risk of unlimited loss depending on how their investments perform.

•   No contribution limits: You are only limited by the amount of money you want (or have) to invest. Beginners should seriously consider how much they are willing to lose before funding their account and trading securities.

•   Liquidity: Brokerage accounts offer full liquidity, enabling you to withdraw and deposit as you please.

Top 3 Types of Brokerage Accounts Explained

There are several types of brokerage accounts: cash brokerage accounts, margin accounts, and discretionary accounts.

1. Cash Brokerage Accounts

Cash brokerage accounts are a straightforward option for investors who want to trade securities without using borrowed funds, or leverage, as you would with a margin account. These accounts only let you invest with the cash you deposit, which can be a simpler approach to investing.

Features:

•   Simple account structure: Cash brokerage accounts are fairly simple in that investors can trade with whatever they deposit.

•   Trading ability: Investors have the ability to trade a wide variety of assets, including stocks, bonds, ETFs, and mutual funds.

Pros and Cons:

Brokerage accounts are simple, offer flexibility, and often do not have maintenance fees. They do not offer leverage, which can affect your trading strategies. They may be best for investors seeking simplicity.

2. Margin Brokerage Accounts

Margin brokerage accounts let you use margin when trading. You can effectively borrow money to trade with directly from the brokerage. Thus, you may require approval from a brokerage to open an account. There’s a higher degree of risk with these accounts than cash brokerage accounts, given that you are borrowing money to invest with. There is a significant risk of loss as well as gain.

Features:

•   Leverage: The ability to borrow funds to increase buying power, allowing you to trade more than your initial balance. Margin comes with interest, however, which can erode potential profits.

•   Risk management tools: Some margin accounts offer features like stop-loss orders or margin alerts to help manage risks.

•   Flexibility: Allows for short selling, providing opportunities to profit from declining markets.

Pros and Cons:

Margin accounts increase purchasing power, allowing investors to make larger trades, potentially leading to higher returns and the opportunity to profit from short selling. However, these benefits come with increased risk, as losses can be amplified, interest costs add up, and margin alerts may require investors to deposit additional funds or sell assets, making careful management essential.

3. Prime Brokerage Accounts

Prime brokerage accounts are designed mostly for institutional investors and high-net-worth individuals. These accounts offer advanced services (e.g., margin trading, securities lending) and proprietary research. These are sophisticated tools designed for experienced traders.

Features:

•   Access to leverage: Prime brokers allow clients to borrow funds for margin trading, enabling higher potential returns (but also increased risk).

•   Customized services: Tailored to meet the needs of sophisticated clients, including advanced trading strategies and risk management.

•   Securities lending: Clients can borrow securities to execute short sales, enhancing their trading flexibility.

•   Clearing and settlement services: Prime brokers handle the logistics of trades, including clearing and settlement, often allowing clients to access a broader range of financial instruments.

•   Research and reporting: Advanced market research, real-time data feeds, and detailed reporting on positions and trades.

Pros and Cons:

Prime brokers offer access to leverage, allowing clients to borrow funds for margin trading and enhance potential returns, while also providing tailored services for institutional investors or high-net-worth individuals. However, these advantages come with increased risk, as borrowing funds for margin trading amplifies potential losses.

Other Types of Brokerage Accounts


In addition to cash, margin, and joint brokerage accounts, there are other account types that serve specific needs and investment strategies. These accounts cater to different financial goals, investor preferences, and tax implications. Some common alternatives include:

•   Custodial Accounts: These accounts are set up by an adult for the benefit of a minor, with the custodian managing the assets until the minor reaches the age of majority.

•   Managed Accounts: In these accounts, a professional portfolio manager makes investment decisions on behalf of the account holder, often for a higher fee.

Each of these account types has unique benefits, tax treatments, and management structures designed to meet specific financial objectives. Depending on your investment goals, it may be advantageous to explore these alternatives to maximize returns and minimize tax liabilities.

How to Choose the Right Brokerage Account for You

Choosing the right brokerage account depends on your investment goals and risk tolerance. For those looking to amplify their investments, a margin account offers leverage, though with added risk. Joint accounts are ideal for shared investments, while more experienced investors may opt for managed or discretionary accounts for professional guidance. Your decision should align with your financial objectives, time horizon, and comfort with risk.

The Takeaway

Brokerage accounts allow owners to buy and sell investments and financial securities. They are offered by a number of financial institutions, and come in a few different types. By and large, though, they’re a very popular choice for investors looking to get their money in the markets.

They do have their pros and cons and associated risks, however. It may be beneficial to speak with a financial professional to learn more about how you can use a brokerage account to your advantage in pursuit of your financial goals.

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).

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 minimum needed to open a brokerage account?

Different brokerage firms will have different rules regarding minimum deposits, but there are many that don’t require a minimum deposit. Again, it’ll depend on the specific firm.

Can I withdraw money from a brokerage account?

You can withdraw money from a brokerage account by transferring funds to a linked bank account, or by requesting a check or wire transfer. Keep in mind that any profits may be subject to capital gains tax, which may vary depending on how long you’ve held the assets among other factors.

Do you pay taxes on brokerage accounts?

The capital gains, dividends, and interest income earned in the account are all taxable, with long-term capital gains benefiting from lower tax rates compared to short-term gains. The specific tax rate depends on factors, such as how long you hold an asset and your overall income, so it’s best to consult with a tax professional for guidance.

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.
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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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