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A Health Savings Account (HSA) can be set up in three simple steps, and once it’s up and running, it can help you bridge the gap between what your health insurance covers and your actual costs, among other benefits.

Let’s face it: Many of us these days select a High Deductible Health Plan, or HDHP, when it comes to health insurance. That means you may be paying a lower monthly premium in exchange for a high deductible. You could potentially get hit with a lot of unforeseen healthcare expenses before your benefits kick in. And even after you meet that deductible, you may have charges that are not reimbursed. A Health Savings Account (HSA) can help you set money aside to fill that gap.

Setting up an HSA may sound intimidating, as if you’ll have to fill out reams of paperwork, but that’s not at all the case! Whether through an employer or on your own, once you’re ready to start saving, the steps to opening an HSA account can be as simple as filling out an online form with basic information — easy peasy.

Here’s a look at the steps involved, plus a few important considerations before you take the leap.

What Is a Health Savings Account (HSA)?

The HSA will be turning 21 soon: In 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act which created the Health Savings Account. These accounts were meant to help people with high deductible health plans set aside money to pay for out-of-pocket medical expenses: copays, dental care, eyeglasses, prescriptions, psychiatric help, and more. This can happen both before and after you reach your deductible.

In addition to covering health costs, these tax-free accounts can lower your amount of federal income tax owed. What’s more, HSAs can help with saving for retirement and unforeseen emergencies.

💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.

How Does an HSA Work?

A Health Savings Account can work just like a checking account. You can make deposits (or contributions), pay bills online, make transfers, and even pay for qualified medical expenses with an HSA debit card. You are free to withdraw HSA funds at any time to pay for health costs not covered by your high deductible health plan. One big note: Once you enroll in Medicare, you can no longer contribute to an HSA.

Deposits can also be contributed by your employer, with direct deposits made into your HSA straight from payroll. A nice aspect of these plans: Health Savings Account contributions roll over every year, so you don’t have to race to spend the pre-tax funds in your account. If you stay healthy, you can build up your emergency fund as well as your retirement nest egg. Your good health can lead to wealth down the line!

Who Can Open an HSA?

According to Federal Guidelines, you qualify to open a Health Savings Account if you:

•   Are covered under a high deductible health plan, or HDHP.

•   Are not covered by any other health plan, including a spouse’s.

•   Are not claimed as a dependent on someone else’s tax return.

•   Are not enrolled in a disqualifying alternate medical savings account, such as an FSA (Flexible Spending Account) or an MSA (a Medicare medical savings account).

•   Are not currently enrolled in Medicare.

How to Set Up a Health Savings Account

Once you’ve established that the pros outweigh the cons, you may wonder exactly how to set up a Health Savings Account (HSA). Fortunately, the process is pretty straightforward:

Step 1: Research Your HSA Options

If an HSA plan is offered directly through your employer, go to Step Two.
If you’re self-employed, investigate HSA options online, or reach out to banks or other financial entities.

Step 2: Fill Out the Necessary Paperwork

The set-up for an HSA is not unlike opening a bank account. You’ll be provided with paperwork or an online form, where you’ll give basic information such as your Social Security Number and proof of your identity (typically verified by a government-issued photo ID).

Step 3: Complete Verification

Be prepared to offer verification of your high deductible health plan (HDHP).

That’s it! It’s a quick and simple process to set up a Health Savings Account.

Once your HSA is up and running, you may be able to opt for automatic regular deposits from your bank account or straight from your paycheck. There is no minimum amount required to open an HSA, but you typically need at least $1,000 in the account in order to invest in certain mutual funds.

HSA Contribution Limits

For tax year 2023, HSA contribution limits are $3,850 for individuals and $7,750 for families with HDHP coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. For 2024, HSA contribution limits are $4,150 for individuals and $8,300 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. There is never a minimum requirement for deposits. Some ground rules to be aware of:

•  You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.

•  You have no supplemental health coverage except what is permitted under other health coverage.

•  You aren’t enrolled in Medicare.

•  You can’t be claimed as a dependent on someone else’s tax return.

Advantages of an HSA

There are many benefits to opening an HSA. Sure, it can provide a cushion or safety net when it comes to out-of-pocket medical costs. But there are other perks beyond covering the price of a new pair of glasses.

Covering Expenses for You and Your Family

From ambulances to acupuncture, a Health Savings Account can cover the costs your HDHP doesn’t. The IRS has an extensive listof ways you can use your HSA funds. One example: Did you know you can also use your Health Savings Account to pay for medical expenses for a spouse or a child — anyone who is part of your tax household — even if they aren’t on your HDHP? It’s true!

Lowering Taxable Income

Here’s another bonus to having this kind of account: Your HSA contributions are made before taxes are deducted, thereby lowering your taxable income. As a result, you may pay less in taxes.

Rollover Contributions

There’s no “use-it-or-lose it” pressure when you have a Health Savings Account. Unused HSA funds don’t disappear at the end of the year. You can roll them over again and again, accumulating tax-free interest. Those earnings can turn into savings to be invested in the future or used for life’s little surprises — say, a chipped tooth.

Saving for Retirement

At age 65, you can start using the funds in your Health Savings Account for anything, without penalty. Withdrawals will be taxed the same as they would from a 401(k) or IRA, but any funds waiting for use will avoid taxes while earning interest.

Additionally, if you are lucky enough to be able to max out your annual IRA and/or 401(k) contributions, an HSA is another way to save more tax-free money toward retirement. Beyond covering copays, an HSA is a great way to get your money working for you.

💡 Quick Tip: Most savings accounts only earn a fraction of a percentage in interest. Not at SoFi. Our high-yield savings account can help you make meaningful progress towards your financial goals.

Disadvantages of an HSA

Okay, now you know the upside of opening an HSA. But there are potential downsides that are worth knowing about and considering before you sign up.

Penalties for Unqualified Expenses

Until you turn 65, HSA funds cannot be used for anything but eligible medical expenses. To do so would subject withdrawals to income taxes and a 20% penalty.

Monthly Fees

Health Saving Account providers may charge a monthly fee. These fees generally tend to be lower than $5 bucks per month, but they do add up. While there are providers out there that don’t charge account management fees, all will assess an investment fee. Do your homework to find the vehicle with the lowest fees.

Potential Losses

Like an IRA or 401(k), any invested money in an HSA can mean monetary gains and losses. As with any investment account, you need to be prepared for your HSA balance to dip if the market trends downward.

Keeping Tabs for Your Tax Records

HSA contributions and expenditures must be reported on your tax return. It may not be a deal-breaker, but for some people, keeping records of your HSA activity can be a nuisance.

Things to Consider When Choosing an HSA

If your job offers a Health Saving Plans, great! They’ve done the research for you. Employers may also offer Flexible Spending Accounts (FSAs). But unlike FSAs, which are owned by an employer and can be inflexible, a Health Savings Account has higher contribution limits and is controlled by you.

If you are self-employed, do your research. You’ll find an array of Health Savings Plans to choose among; HSA comparison websites can help you navigate the search. Remember to pay attention to any monthly/annual fees so you know exactly what to expect. Ideally, you’ll want an HSA that makes it easy to manage your account online. Many banks and credit unions offer HSAs, so check with your financial institution.

The Takeaway

Once you’ve made the decision to enroll in a Health Savings Account, the steps to set it up are relatively painless. You can start using your HSA funds right away to help cover qualified health-related costs. Contributions are made with pre-tax dollars, don’t need to be used up by the end of the year, and can potentially even help boost your retirement fund. A Health Savings Account goes beyond just covering your healthcare expenses and can serve as one of the best tax-advantaged savings vehicles available. It can enhance your sense of security and keep your wealth growing.

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.

FAQ

How do I set up an HSA account?

With a valid government-issued photo ID, Social Security number, and proof of your HDHP, you can fill out a basic paper or online HSA form, provided by an employer or financial institution.

Can I start an HSA on my own?

Yes. As long as you are enrolled in an HDHP and not covered under someone else’s policy, you can start an HSA.

How much does it cost to open an HSA?

The initial sign-up is free, and there is no minimum deposit amount to start. But expect investment fees and possibly monthly management fees.

Photo credit: iStock/AndreyPopov

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% 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 Bank shall, in its sole discretion, assess each account holder’s 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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.

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Keeping all your cash in a checking account may seem like the simplest way to manage your money. But if that’s the only type of bank account you have, you’re missing out on all the benefits that come with a savings account.

No matter what your financial goals are or how much money you’re able to set aside, opening a savings account is probably a good idea. You typically don’t need a lot of money to open a savings account, and a high-yield savings account allows you to earn a competitive interest rate while still keeping your money safe and accessible.

Read on to learn why a savings account can be an important component in anyone’s financial toolkit.

1. Separate Your Saving From Your Spending

A savings account is designed to hold money you don’t need right away. Maybe you’re looking to save up for a large upcoming expense, like a vacation, car, or downpayment on a home. Or, perhaps you want to build an emergency fund to provide backup for any unexpected bumps in the road (like a medical bill, car repair, or loss of income). A savings account can help you reach these goals by putting some distance between your savings and your daily spending needs.

Without a savings account, it can be all too easy for the money in your checking account to become an all-purpose fund where you spend more than you planned. If funds earmarked for future spending are stored in your savings account, you might think twice about delaying your future plans for an impulse purchase like new shoes or a fancy meal out.

You might even opt to open multiple savings accounts to help you organize your cash by goals. Maybe you have an emergency fund but are saving for a trip or new furniture. Savings accounts are typically easy to open and separating your money can help you monitor progress towards each goal.

2. Your Money Is Insured

With investing, you could lose money, break even, or earn a return — there are no guarantees. If you open a savings account at a bank insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Association (NCUA), on the other hand, your money is guaranteed up to $250,000 per depositor, per ownership category.

This means that even if the financial institution fails, your savings are protected up to that limit. You would either receive that money directly or, more likely, a new account would be opened for you at another bank with the same balance you had before.

Your money is generally safer in a savings account than under the mattress or in a piggy bank. If your stash of cash were stolen or destroyed in a fire or flood, you likely would not be able to get your money back.

3. You Earn Interest on Deposits

Savings accounts typically offer a higher annual percentage yield (APY) than checking accounts, which are designed for spending and not necessarily for accumulating large balances. This allows you to earn money on your money just by letting it sit in the bank.

While the average savings account APY is only 0.47%, some banks and credit unions offer much more than the average. The best savings account interest rates are now around 5.00%. If you put $10,000 into a savings account that pays 5.00% APY, you would earn about $500 in a year. An account paying just 0.40% APY, on the other hand, would earn about $40. The more you deposit, and the longer it stays in the account, the greater the difference in returns.

Generally, you can find the highest APYs and lowest fees at online-only banks. Without the added expenses of large branch networks, online banks are usually able to offer more favorable returns than national brick-and-mortar institutions.

4. It Doesn’t Require a Large Initial Investment

Many investments, such as mutual funds, require a significant amount of money as an initial investment, sometimes thousands of dollars. Savings accounts, on the other hand, typically have a low bar for entry. Traditional brick-and-mortar banks often request an initial deposit, but it can be as low as $25 to $100. Many online-only banks have no minimum deposit requirements.

With some traditional savings accounts, you need to keep your average monthly balance above a certain threshold (such as $300 or $500) to earn a certain interest rate or to avoid monthly fees. Many online savings accounts, however, don’t charge monthly service fees, and don’t require that you keep a specific amount of money in the account to avoid fees or get a certain APY.

5. Your Money Is Accessible

Unlike investment accounts, most savings accounts (even online-online accounts) can be accessed any time at an ATM. Just insert your debit card, tap some buttons, and you can get your money in hand. With a traditional savings account, you can also get cash in person at a teller.

If you need more money in your checking account, you can simply go online or use your bank’s app to transfer money from your savings account to your checking account, even if the accounts are at two different banks.

This is why many people use a savings account for their emergency fund. When the unexpected happens, you can easily access the funds you need and immediately deal with the problem. There’s no waiting period or need to sell off investments to gain access to your money.

That said, savings accounts typically come with withdrawal limits, often six per month. If you exceed your bank’s monthly limit, you may get hit with a fee. These limits aren’t necessarily a bad thing, though. After all, savings accounts are designed for saving rather than spending.

6. You Can Put Saving on Auto Pilot

Finding extra cash to set aside each month isn’t always easy. A great way to make sure you’re working towards your near-term savings goals is to establish an automatic monthly deposit into a savings account. This can help you build up your savings without thinking about it.

You can automate saving by setting up a recurring transfer from your checking account to your savings account on the same day each month (perhaps right after you get paid). Or, you might choose to automatically direct deposit a portion of each paycheck into savings, with the rest going to checking.

It’s fine to start small. Since the money will get added to your account every month without fail, putting just $50 or $100 a month into savings can add up to a significant sum over time.

If you’re married or in a domestic partnership, you might consider opening a joint savings account to help you work towards mutual goals. You can each set up an automatic deposit into that account, doubling your efforts.

The Takeaway

Opening a savings account is a good way to keep savings safe and easily accessible while earning a higher interest rate than checking accounts provide. This type of account can be a great choice for your emergency fund or to work towards short-term savings goals, like a vacation, home upgrade, or large purchase.

If you decide a savings account is what you need, shopping around to compare APYs, account fees, and features can help you choose the right savings account to meet your goals.

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.

Photo credit: iStock/Povozniuk

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% 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 Bank shall, in its sole discretion, assess each account holder’s 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 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.

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.

SOBK0124009

What Is an IPO?

An IPO, or initial public offering, refers to privately owned companies selling shares of the business to the general public for the first time.

“Going public” has benefits: It can boost a company’s profile, bring prestige to the management team, and raise cash that can be used for expanding the business.

But there are downsides to going public as well. The IPO process can be costly and time-consuming, and subject the business to a high level of scrutiny.

How Do IPOs Work?

To have an IPO, a company must file a prospectus with the SEC. The company will use the prospectus to solicit investors, and it includes key information like the terms of the securities offered and the business’s overall financial condition.

Behind the scenes, companies typically hire investment bankers and lawyers to help them with the IPO process. The investment bankers act as underwriters, or buyers of the shares from the company before transferring them to the public market. The underwriters at the investment bank help the company determine the offering price, the number of shares that will be offered, and other relevant details.

The company will also apply to list their stock on one of the different stock exchanges, like the New York Stock Exchange or Nasdaq Stock Exchange.

IPO Price vs Opening Price

The IPO price is the price at which shares of a company are set before they are sold on a stock exchange. As soon as markets open and the stock is actively traded, that price begins to go up or down depending on consumer demand, which is known as the opening price.

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

History of IPOs

While there are some indications that shares of businesses were traded during the Roman Republic, the first modern IPO is widely considered to have been offered by the Dutch East India Company in the early 1600s. In general, the Dutch are credited with inventing the stock exchange, with shares of the Dutch East India Company being the sole company trading in Amsterdam for many years.

In the U.S., Bank of North America conducted the first American IPO, which likely took place in 1783. A report claims investors hiding cash in carriages evaded British soldiers to buy shares of the first American IPO.

Henry Goldman led investment bank Goldman Sachs’ first IPO — United Cigar Manufacturers Co. — in 1906, pioneering a new way of valuing companies. A challenge for retail companies at the time was that they lacked hard assets, as other big businesses like railroads had at the time. Goldman pushed to value companies based on their income or earnings, which remains a key part of IPO valuations today.

Why Does A Company IPO, or “Go Public”?

Defining what an IPO is doesn’t explain why a company “goes public” — an important detail in the process. Because an IPO requires a significant amount of time and resources, a business probably has good reason to go through the trouble.

Raising Money

A common reason is to raise capital (money) for possible expansion. Prior to an IPO, a private company may procure funding through angel investors, venture capitalists, private investors, and so on.

A company may reach a size where it is no longer able to procure enough capital from these sources to fund further expansion. Offering sales of stock to the public may allow a company to access this rapid influx of investment capital.


💡 Quick Tip: Keen to invest in an IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

Exit Opportunity

An IPO may be a way for early stakeholders, such as angel investors and venture-capital firms, to cash out of their holdings. Venture-capital firms in particular have their own investors that need to provide returns for. IPOs are a way for them to transfer their share of a private company by selling their equity to public investors.

More Liquidity

Venture-capital firms and angel investors aren’t the only ones who may be seeking more liquidity for stakes in companies. Liquidity refers to the ease with which an investor can sell an asset. Stocks tend to be much more liquid assets than private-company stakes.

Hence, employees with equity options can also use IPOs as a way to gain more liquidity for their holdings, although they are usually subject to lock-up periods.

Publicity

From the roadshow that investment banks hold to inform potential investors about the company to when executives may ring the opening bell at a stock exchange, an IPO can bring out greater publicity for a company.

Being listed as a public company also exposes a business to a wider variety of investors, allowing the business to obtain more name recognition.

Pros and Cons of an IPO

As with any business decision, there are downsides and risks to going public that should be considered in conjunction with the potential benefits. Here’s a look at a few:

Participating in an IPO: 3 Steps to Buying IPO Stock

1. Read the Prospectus

IPOs can be hard to analyze: It’s difficult to learn much about a company going public for the first time. There’s not a lot of information floating around beforehand since when companies are private, they don’t really have to disclose any earnings with the SEC. Before an IPO, you can look at two documents to get information about the company: Form S-1 and the red herring prospectus.

2. Find Brokerage

If you want to purchase shares of a stock in an IPO, you’ll most commonly have to go through a broker. Some firms also let you buy shares at the offering price as opposed to the trading price once the stock is on the public market.

3. Request Shares

Once a brokerage account is set up, you can let your broker know electronically or over the phone how many shares of what stock you’d like to buy and what order type. The broker will execute the trade for you, usually for a fee, although many online brokerages now offer zero commission trading.

Who Can Buy IPO Stock?

Not everyone has the ability to buy shares at the IPO price. When a company wants to go public, they typically hire an underwriter — an investment bank — that structures the IPO and drums up interest among investors. The underwriter acquires shares of the company and sets a price for them based on how much money the company wants to raise and how much demand they think there is for the stock.

The underwriter will likely offer IPO shares to its institutional investors, and it may reserve some for other people close to the company. The company wants these initial shareholders to remain invested for the long-term and tries to avoid allocating to those who may want to sell right after a first-day pop in the share price.

Investment banks go through a relatively complicated process in part to help them avoid some of the risks associated with a company going public for the first time. It’s possible that the IPO could become oversubscribed, e.g when there are more buyers lined up for the stock at the IPO price than there are actual shares.

When Can You Sell IPO Stock?

Shortly after a company’s IPO there may be a period in which its stock price experiences a downturn as a result of the lock-up period ending.

The IPO lock-up period is a restriction placed upon investors who acquired company stock before it went public that keeps them from selling their shares for a certain period of time after the IPO. The lock-up period typically ranges from 90 to 180 days. It’s meant to prevent too many shares in the early days of the IPO from flooding the market and driving prices down.

However, once the period is over, it can be a bit of a free-for-all as early investors cash in on their stocks. It may be worth waiting for this period to pass before buying shares in a newly public company.

Things to Know Before Investing in an IPO

An IPO, by definition, gives the investing public an opportunity to own the stock of a newly public company. However, the SEC warns that IPOs can be risky and speculative investments.

IPO Market Price

To understand why investing in an IPO can be risky, it is helpful to know that the business valuation and offering price have not been determined not by the market forces of supply and demand, as is the case for stocks trading openly in a market exchange.

Instead, the offering price is usually determined by the company and the underwriters who negotiate a price based on an often-competing set of interests of involved parties.

Post-IPO Trading

Purchasing shares in the market immediately following an IPO can also be risky. Underwriters may do what they can to buoy the trading price initially, keeping it from falling too far below the offering price.

Meanwhile, IPO lock-up periods may stop early investors and company executives from cashing out immediately after the offering. The concern to investors is what happens to the price once this support ends.

Data from Dealogic shows that since 2010, a quarter of U.S. IPOs have seen losses after their first day.

IPO Due Diligence

Investors with the option to invest in an IPO should do so only after having conducted their due diligence. The SEC states that “being well informed is critical in deciding whether to invest. Therefore, it is important to review the prospectus and ask questions when researching an IPO.”

Investors should receive a copy of the prospectus before their broker confirms the sale. To read the prospectus before then, check with the company’s most recent registration statement on EDGAR, the SEC’s public filing system.

IPO Alternatives

Since the heady days of the dot-com bubble, when many new companies were going public, startups have become more disgruntled with the traditional IPO process. Some of these businesses often complain that the IPO model can be time-consuming and expensive.

Particularly in Silicon Valley, the U.S. startup capital, many companies are taking longer to go public. Hence, the emergence of so many unicorn companies — businesses with valuations of $1 billion or greater.

In recent years, alternatives to the traditional IPO process have also emerged. Here’s a closer look at some of them.

Recommended: Guide to Tech IPOs

Direct Listings

In direct listings, private companies skip the process of hiring an investment bank as an underwriter. A bank may still offer advice to the company, but their role tends to be smaller. Instead, the private company relies on an auction system by the stock exchange to set their IPO price.

Companies with bigger name brands that don’t need the roadshows tend to pick the direct-listing route.

SPACs

Special purpose acquisition companies or SPACs have become another common way to go public. With SPACs, a blank-check company is listed on the public stock market.

These businesses typically have no operations, but instead a “sponsor” pledges to seek a private company to buy. Once a private-company target is found, it merges with the SPAC, going public in the process.

SPACs are often a speedier way to go public. They became wildly popular in 2020 and 2021 as many famous sponsors launched SPACs.

Crowdfunding

Crowdfunding is collecting small amounts of money from a bigger group of individuals. The advent of social media and digital platforms have expanded the possibilities for crowdfunding.

The Takeaway

Initial public offerings or IPOs are a key part of U.S. capital markets, allowing private businesses to enter the world’s biggest public market. Conducting an IPO is a multi-step, expensive process for private companies but allows them to significantly expand their reach when it comes to fundraising, liquidity and brand recognition.

For investors, buying an IPO stock can be tempting because of the potential of getting in on a company’s growth early and benefiting from its expansion. However, it’s important to know that many IPO stocks also tend to be untested, meaning their businesses are newer and less stable, and that the stock price can fluctuate — creating considerable risk for investors.

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

Explore the IPO Series:

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What Is the IPO Process?

What Are IPO Proceeds?

IPO vs Acquisition: Advantages and Disadvantages

How Are IPO Prices Set?

What Is an IPO Underwriter and What Do They Do?

What Is an IPO Roadshow?

How Many Companies IPO Per Year? 2023 Trends

What Is a Quiet Period?

What Is IPO Subscription Status?

Navigating the IPO Lock-up Period

What Is IPO Due Diligence?

How to Find Upcoming IPO Stocks Before Listing Day

What Is an IPO Pop?

What to Do With Company Stock If Your Company Goes Public

IPO Book-Building Process Explained

Hot Issues (IPOs): What You Need to Know

What Is Pre-IPO Placement?

Do IPOs Offer Dividends?

Testing the Waters: What It Means in an IPO

Testing the Waters: What It Means in an IPO

Shorting an IPO: When Can You Do It?

Guide to the Dual-Track Process for IPOs

What Is Gross Spread?

IPO Oversubscription: Definition & Examples

A Guide to Tech IPOs

History of IPOs That Failed

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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.