Initial public offering (IPO) book building is a process to help determine the share price for an IPO.
With book building, the investment bank that underwrites an IPO reaches out to institutional investors to gauge their interest in buying shares of a company looking to go public. The underwriter asks those interested to submit bids detailing the number of shares they seek to own and at what price they would be willing to pay.
Read on to discover how book building works and how it can affect the price of an IPO.
Key Points
• Book building is the preferred method by which a company prices IPO shares.
• There are five key steps in the IPO book building process: find a banker, collect bids, determine a price, disclose details, and allotment.
• Partial book building is restricted to institutional investors, while accelerated book building is used for large equity offerings to raise capital in a short period.
• The risk of an IPO being underpriced or overpriced when shares go public can lead to volatility, making IPO investing a high-risk endeavor.
• The goal of book building is to ensure proper market-based price discovery to help the issuing company set a fair share price.
What Is Book Building?
Book building is the preferred method by which a company prices IPO shares. It is considered the most efficient way to set prices and is recommended by all the major stock exchanges.
Among the first steps of the IPO process is for the private company to hire an investment bank to lead the underwriting effort. IPO book building happens when the IPO underwriter gathers interest from institutional investors, such as fund managers and other large investors, to “build the book” of that feedback and determine the value of the private company’s shares.
As part of the IPO process, the investment bank must promote the company and the offering to stir up interest before they can determine share price.
This is typically called an IPO roadshow. If the underwriter finds that there is sufficient interest based on responses from the investor community, then the bank will determine an offering price.
Book building is common practice in most developed countries. It has become more popular than the fixed-pricing method, which involves setting an IPO price before measuring investor interest. Book building, on the other hand, generates and records investor interest to land on an IPO price.
Book building can help find a fair share price for a private company based on market interest. When a bank gauges market interest, a floor price is sometimes used, and bids arrive at or above that floor price. The stock price is determined after the bid closing date. With the book building method, demand can be seen in real-time as the book is being built.
💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.
Book-Building Process
Firms going public want to sell their stock at the highest possible price without deterring the investment community. There are five key steps the issuing company must perform in the process of IPO book building in order to discover a market-based share price.
1. Find a Banker: The issuing company hires an investment bank to underwrite the transaction. The underwriter advises the company, guiding it through the lengthy book-building process. The investment bank, as a firm commitment underwriter (the most common underwriting arrangement in an IPO), also commits to buying all the shares from the issuer, carrying all the risk. The bank will then resell the shares to investors.
2. Collect Bids: The investment bank invites investors to submit bids on the number of shares they are interested in and at what price. This solicitation and the preliminary bids give the bankers and the company’s management an indication of the market’s interest for the shares. Roadshows are often used to grow investor appetite.
3. Determine a Price: The book is built by aggregating demand as the bids arrive. The bank uses a weighted average to determine a final cutoff price based on indications of interest. This step helps with pricing an IPO.
4. Disclosure: The underwriter must disclose details of the bids to the public.
5. Allotment: Accepted bidders are allotted shares.
Even if the IPO book-building process goes smoothly and a price is set, it does not ensure that actual transactions will take place at that price once the IPO is open to buyers. Book building simply helps to gauge demand and determine a fair market-based price. But substantial risks remain for interested investors, who could see steep losses if the share price drops after the IPO.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
What Is Partial Book Building?
Partial book building is another form of the IPO book-building process that happens only at the institutional level, rather than the retail level.
With partial book building, a select group of investors is approached regarding their interest in the IPO. Using their bids, a weighted average price is calculated and a cutoff price is determined. That cutoff price is then used as the public offering price to retail investors as a fixed price. The cost of the partial book-building IPO process is often lower due to its relative efficiency.
What Is Accelerated Book Building?
Accelerated book building is used for large equity offerings to raise capital in a short period of time. The investment bank is tasked with book building, determining a cutoff price, and allocating shares within 48 hours or less. No roadshow is involved.
The accelerated book-building process is typically used when a company needs immediate financing and raising capital from debt is off the table. It is typically done when a firm seeks to acquire another company.
Accelerated book building is often conducted overnight, with the issuing company asking investment banks to serve as underwriters before the next day’s placement.
What Effect Does Book Building Have On IPO Prices?
A good IPO book-building process helps ensure proper market-based price discovery. Still, there is the risk that an IPO can be underpriced or overpriced when shares finally go public. This can lead to volatility, which IPO investors also need to be aware of. This is one reason why IPOs are considered high-risk endeavors.
Underpricing happens when the offering price is below the share price on the first day of trading. In other words, the IPO is selling for less than its true market value. With an underpriced IPO, a company is said to have left money on the table because they could have set the offering price higher.
An overpriced IPO — meaning the offering price is above the stock’s true market value and higher than investors are willing to pay for it — can have negative implications for the future price of a stock due to poor investor response.
Investors may buy IPO stock on Day One of trading in the secondary market, while qualified investors can purchase IPO shares before they begin trading in the open market.
While there is no surefire way to guarantee a good IPO price, the book-building IPO method generally offers quality pre-market price discovery customized to the issuer. It also reduces the risk for the underwriter. It can have high costs, however, and there is the risk that the IPO will end up being underpriced or overpriced. The overall goal is to see a good and steady stock performance during and after the IPO.
The Takeaway
The book-building IPO process involves five critical steps to ensure a stock goes public promptly with as few hiccups as possible.
There are different types of IPO book building, and the way an investment bank performs the process can impact IPO prices. The goal is to set a fair market-based price for shares of the company looking to go public.
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.
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FAQ
What are the steps in book building?
There are five main steps in the book-building IPO process:
1. The issuing company hires an investment bank to underwrite the offering. The bank determines a share price value range and writes a prospectus to send to potential institutional investors.
2. The underwriting bank invites institutional investors to submit bids on how many shares they want to buy and at what price.
3. The book is built by sorting and summing up demand for the shares to calculate a final IPO price. It’s known as the cutoff price.
4. The investment bank is required to disclose the details of submitted bids to the public.
5. Shares are allocated to bidders who meet or exceed the final cutoff price.
What is 100% book building?
100% book building is when all of the company’s shares are sold through the book-building process. The final issue price of the shares is determined entirely by investor bids and demands.
Who carries out book building in an IPO?
The underwriters in an IPO, which are typically large investment banks, carry out the book building process. They build the book by asking institutional investors to submit bids for the number of shares of the company they’d be willing to buy and the price they would pay for the shares. They then list and evaluate investor demand based on the bids and use that information to set a price for the shares.
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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. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
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A growth fund is a type of mutual fund or exchange-traded fund (ETF) that’s typically invested in growth stocks, i.e., companies that aim to deliver substantial positive cashflow and better-than-average returns. Growth funds are focused on capital appreciation over time.
Growth funds primarily include shares of growth stocks, but can also include bonds or other investments designed specifically with higher returns in mind. Individual growth funds typically focus on small- , mid- , or large-cap stocks (although some might offer a mix).
Unlike some value funds, growth funds rarely pay dividends. Instead, investors make money on the appreciation of the underlying stocks. Since growth mutual funds are considered somewhat riskier investments — with a higher risk of loss along with a potential for bigger gains — holding these funds for the longer term may help mitigate the short-term impact of price volatility.
Key Points
• In investing, a growth strategy is a more aggressive approach that’s focused on generating returns.
• Growth funds are primarily invested in growth stocks: shares of companies that aim to deliver returns.
• Growth funds may include stocks as well as bonds or other securities.
• A growth strategy can be risky, as it includes the potential for losses.
• Growth funds, like the growth stocks in their portfolios, generally don’t pay dividends, but reinvest earnings to fuel further growth.
What Is Growth Investing?
Growth investing is a strategy that focuses on increasing company revenue or investor returns. For this reason, growth investors may invest in younger or smaller companies, when they invest online or through a traditional brokerage, which are said to be in a growth phase, and whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
Growth Companies, Growth Strategies
Growth stocks aren’t always new companies, though. Larger, more established companies can also fall into this category, assuming they are poised for expansion. Big companies could be in a growth phase due any number of factors:
• Technological advances
• Shift in strategy
• Movement into new markets
• Acquisitions
How much growth can you expect to get from growth stock mutual funds? As with any mutual fund, the performance of these funds depends on their underlying assets and, in the case of actively managed funds, their portfolio managers’ strategies.
There are also growth index funds, which are passively managed. A growth index fund is a growth stock mutual fund that tracks the performance of a particular stock index that’s focused on growth (e.g., the CRSP Large Growth Index or CRSP Small Cap Growth Index).
Growth Fund Performance
To give you an example of how growth funds compare to the domestic equity market as a whole, the U.S. stock market had an average return of 11.6% in the last decade, compounded annually, as of Aug. 1, 2025, according to Yahoo Finance.
For context, here is the performance of five growth mutual funds and ETFs over the last 10 years, data from Morningstar, as of June 30, 2025.
Morgan Stanley Institutional Fund, Inc. Growth Portfolio (MGHRX)
$4.6 billion
5.74%*
Source: Morningstar, as of June 30, 2025
*5-year returns used; inception August 2018 for FHOFX, June 2018 for MGHRX.
Remember that growth investing can be volatile since companies typically take some risks in order to expand. Also, some growth companies can get a lot of media or investor attention, which can contribute to price swings as investors buy and sell shares with the hope of seeing a profit.
Examples of Growth Stocks
Market capitalization — which indicates the number of outstanding shares a company has multiplied by its price per share — is not a specific hallmark or characteristic of growth stocks. Growth stocks can be large-cap corporations, mid-cap, or smaller companies. That said, most growth funds generally tilt toward larger companies.
Large-cap companies can scale their manufacturing to produce more products at cheaper prices, which increases their potential. Plus, big companies tend to reinvest the money they make into research and development, acquisitions, or expansion.
Information technology companies are often the largest holdings in U.S. growth mutual funds, but these funds may also hold healthcare and consumer discretionary stocks as well.
Smaller companies also have a lot of growth potential, as noted above — and some small-cap companies may be in the initial startup phase, which can sometimes generate outsize growth. And many mid-cap companies have been around longer and may have the ability to adapt to new market needs.
There are a few good reasons to consider growth stock mutual funds, and portfolio diversification is a consideration here.
It would be expensive for most individual investors when trading stocks to achieve the level of diversification offered by a pooled investment like a growth mutual fund. Investing in a single fund gives investors exposure to a wide range of stocks in different sectors.
Growth funds may also have long-term potential. For instance, growth stocks are more likely to see returns during an economic boom cycle, when many companies are growing and thriving. But shares can also be volatile, which is one of the risks of the sector.
While investors may not be able to count on dividend income from a growth mutual fund, they may still be able to sell the fund for more than what they paid for it, although there are no guarantees.
Downside of Growth Mutual Funds
Like any other investment, there are potential drawbacks to keep in mind with growth stocks and their growth fund counterparts.
While growth stocks can potentially increase in value more quickly than other stocks, this also makes them a potentially risky and more volatile investment. A typical growth stock mutual fund might return 18.0% one year and –6.0% the next. That kind of volatility isn’t for everyone.
In order for a growth stock to keep growing, the company must continue to earn money. This is challenging for any company to maintain over a long period of time. If there’s a recession, if a company has an unforeseen loss, or can’t continue to grow, the value of the stock may go down.
To help manage this risk, investors may choose to hold growth stocks and growth mutual funds for the five to 10 years, so that they can ride out market fluctuations and potentially be more likely to make a profit.
It’s also important to keep in mind that some growth stocks could become overvalued by the market, which might impact a growth fund’s performance. In this scenario, an investor might buy shares in a growth fund, hoping for solid returns. But if one or more of the underlying companies in those funds ends up being overvalued, the stock’s performance might fall below investor expectations.
Evaluating a Company’s Potential for Growth
Assessing a company’s potential for growth, either in the near or long term, is not an exact science. But it’s important to consider how likely a company is to grow when determining whether it’s a good fit for a growth portfolio. This typically involves looking at several key metrics, including:
• Return on Equity (ROE). Return on equity is used to measure company performance. It’s calculated by dividing net income by shareholder equity over a set time period.
• Earnings Per Share (EPS). Earnings per share represents a company’s total profit divided by its total number of outstanding shares. EPS is used to measure a company’s profitability.
• Price to Earnings to Growth (PEG). The price to earnings to growth ratio represents the price to earnings (P/E) ratio of a stock divided by the growth rate of its earnings over a set time period. Growth funds tend to have a higher P/E ratio (price to earnings ratio), which is the cost of a company’s stock relative to its earnings-per-share (EPS) than other funds. This can make them more expensive, but their potential for growth might make the extra cost worth it.
When using these and other metrics to measure a company’s growth potential, it’s important to understand how to interpret them. For example, a company that has a higher earnings per share is generally viewed as being more profitable. Likewise, a high price to earnings ratio is considered to be an indicator of continued growth.
But investors should also consider how sustainable the outlook for profitability and growth truly is, given the context of a company’s revenue, debt, and cash flows.
Buying Growth Mutual Funds
When choosing which growth stocks or growth funds to invest in, there are several factors investors may choose to consider. These include:
• Historical performance
• Stocks and other securities held in the fund
• Fund fees (e.g., the expense ratio)
• Potential earnings
Growth funds can often — but not always — be identified by the word growth in their name. Some investors might choose to put their money in blended funds, which combine growth stocks with less risky holdings. These funds allow investors to benefit from some of the upsides of growth funds without quite as much risk.
Certain growth funds are exchange-traded funds, or ETFs. Like any ETF, these funds can be traded during the day like stocks.
It’s important for investors to understand the risks before investing in any stock or fund, and to build a diversified portfolio of assets in order to help mitigate risk. With a diversified portfolio, investors hold both riskier assets and less volatile assets, in an effort to reap potential benefits of growth without losing too much along the way.
It’s also vital to remember that past performance is not a guarantee of how well a stock or growth fund will perform in the future.
Growth investing and value investing are couched as different styles of investing, yet they share a similar profit-driven focus — just a different means of getting there. With growth investing, the overarching goal is to invest in companies that have solid potential for growth. With value investing, the goal instead is to find companies that have been undervalued by the market — and hopefully see them increase in value.
A value investor may seek out companies that they believe are bargains based on current market price. They then invest in these companies, either by purchasing individual shares or through value mutual funds, and hold onto those investments over time. The end goal is to eventually sell their shares for a profit down the line.
In addition to eventual capital appreciation, value stocks can also pay dividends to investors. Value stocks are typically more likely to be established companies rather than newer ones. The most important thing to know with value investing vs. growth investing is how to avoid a value trap. This is a company that appears to be undervalued, but actually has a correct valuation. In that case, an investor might buy in, expecting the stock’s price to rise over time, only to be disappointed by a price that stays the same or worse, declines.
Determining When to Invest in Growth Mutual Funds
Dollar cost averaging is a way to invest small amounts of money consistently over time, rather than attempting to time the market, which helps investors to limit their risk exposure. However, if there is a stock market correction, it can be a good time to pick up some extra assets while they’re at particularly low prices.
Growth stocks tend to do well during bull markets, so while they may not see significant gains during a recession, they can still be an option to consider for long-term investments to pick up before the next economic boom.
The Takeaway
Growth stocks have a primary goal of capital appreciation. These stocks are expected to grow more quickly than other stocks in the market, and because of this, growth mutual funds are considered riskier investments than other mutual funds with a high risk of loss along with a higher potential for gain.
Growth funds holdings tend to have a higher P/E ratio (price to earnings ratio), which can make them more expensive investments, but their rapid growth may make the extra cost worth it.
These types of funds are more likely to see returns during an economic boom, vs during a recession. During a recession or economic downturn, companies may not have the cash or earnings to be able to invest in growth, and the value of the stocks the fund could go down.
Investors who know the basics of growth mutual funds may be interested in adding some of these assets, or other types of mutual funds and ETFs, to their investment portfolio.
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FAQ
Do growth funds pay dividends?
No, typically growth funds do not pay dividends because the underlying stocks held in the fund, which are growth stocks, reinvest profits into the company to fuel growth.
How risky is a growth fund?
Growth funds, like growth stocks, are generally considered higher risk owing to the volatility of some of the stocks they hold. Some investors may appreciate the potential for bigger gains, while others may not tolerate the risk exposure.
Which is better, investing for growth or income?
Choosing between an income strategy or a growth strategy will likely depend on your investment time horizon, as well as your goals. Investors in retirement may prefer investing with income in mind; younger investors with more years to ride out any volatility may want to invest in growth funds.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves through upturns and downturns. A cyclical stock is the opposite of a defensive stock, which tends to offer more consistent returns regardless of macroeconomic trends.
Investing in cyclical stocks could be rewarding during periods of economic prosperity. During a recession, however, certain types of cyclical stocks may be affected if consumers are spending less.
Key Points
• Cyclical stocks may align with economic trends, offering higher returns during periods of growth.
• Cyclical stock investments may represent discretionary items that consumers may be less likely to purchase when the economy slows.
• Travel, retail, and entertainment are examples of cyclical sectors.
• Defensive stocks may provide more stable returns independent of economic trends, contrasting with cyclical stocks.
• Cyclical stocks can be subject to uneven short-term returns, but may offer long-term appreciation.
What Is a Cyclical Stock?
A cyclical stock is a stock that may perform differently depending on what part of the market cycle the stock market is in at a given time. These types of stocks tend to overlap with the broader economic cycle. As such, the stock market is not static; it moves in cycles that often mirror the broader economy. To understand cyclical stocks, it helps to understand how the market changes over time, with the understanding that this has a different impact on different types of stocks.
A single stock market cycle involves four phases:
Accumulation (trough)
After reaching a bottom, the accumulation phase signals the start of a bull market and increased buying activity among investors.
Markup (expansion)
During the markup phase more investors may begin pouring money into the market, pushing stock valuations up.
Distribution (peak)
During this phase, investors begin to sell the securities they’ve accumulated, and market sentiment may begin to turn neutral or bearish.
Markdown (contraction)
The final phase of the cycle stock is a market downturn, when prices begin to significantly decline until reaching a bottom, at which point a new market cycle begins.
Cyclical Stocks Examples
The cyclicality of a stock depends on how they react to economic changes. The more sensitive a stock is to shifting economic trends, the more likely investors would consider it cyclical. Some of the most common cyclical stock examples include companies representing these industries:
Generally, consumer cyclical stocks represent “wants” versus “needs” when it comes to how everyday people spend. That’s because when the economy is going strong, consumers may spend more freely on discretionary purchases. When the economy struggles, consumers may begin to cut back on spending in those areas.
Cyclical Stocks vs Non-cyclical Stocks
Cyclical stocks are the opposite of non-cyclical or defensive stocks. Noncyclical stocks don’t necessarily follow the movements of the market. While economic upturns or downturns can impact them, they may be more insulated against negative impacts, such as steep price drops.
Non-cyclical stocks examples may include companies from these sectors or industries:
• Utilities, such as electric, gas and water
• Consumer staples
• Healthcare
Defensive or non-cyclical stocks represent things consumers are likely to spend money on, regardless of whether the economy is up or down. So that includes essential purchases like groceries, personal hygiene items, doctor visits, utility bills, and gas. Real estate investment trusts that invest in rental properties may also fall into this category, as recessions generally don’t diminish demand for housing.
Cyclical stocks may see returns shrink during periods of reduced consumer spending. Defensive stocks, on the other hand, may continue to post the same, stable returns or even experience a temporary increase in returns as consumers focus more of their spending dollars on essential purchases.
There are several reasons to consider investing in cyclical stocks, though whether it makes sense to do so depends on your broader investment strategy. Cyclical stocks are often value stocks, rather than growth stocks. Value stocks are undervalued by the market and have the potential for significant appreciation over time. Growth stocks, on the other hand, grow at a rate that outpaces the market average.
If you’re a buy-and-hold investor with a longer time horizon, you may consider value cyclical stocks. But it’s important to consider how comfortable you are with investment risk and riding out market ups and downs to see eventual price appreciation in your investment. When considering cyclical stocks, here are some of the most important advantages and disadvantages to keep in mind.
Some potential advantages of investing in cyclical stocks include the following.
• Return potential. When a cyclical stock experiences a boom cycle in the economy, that can lead to higher returns. The more money consumers pour into discretionary purchases, the more cyclical stock prices may rise.
• Predictability. Cyclical stocks often follow market trends, making it potentially easier to forecast how they may react under different economic conditions. This could be helpful in deciding when to buy or sell cyclical stocks in a portfolio.
• Value. Cyclical stocks may be value stocks, which can create long-term opportunities for appreciation. This assumes, of course, that you’re comfortable holding cyclical stocks for longer periods of time.
Cons of Cyclical Stocks
Some potential disadvantages of investing in cyclical stocks include the following.
• Volatility. Cyclical stocks are by nature more volatile than defensive stocks. That means they could post greater losses if an unexpected market downturn occurs.
• Difficult to time. While cyclical stocks may establish their own pricing patterns based on market movements, it can still be difficult to determine how long to hold stocks. If you trade cyclical stocks too early or too late in the market cycle, you could risk losing money or missing out on gains.
• Uneven returns. Since cyclical stocks move in tandem with market cycles, your return history may look more like a rollercoaster than a straight line. If you’re looking for more stable returns, defensive stocks could be a better fit.
💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
How to Invest in Cyclical Stocks
When considering cyclical stocks, it’s important to do the research before deciding which ones to buy. Having a basic understanding of fundamental analysis and technical analysis can help.
Fundamental analysis means taking a look under a company’s hood, so to speak, to measure its financial health. That can include looking at things like:
• Assets
• Liabilities
• Price-to-earnings (P/E) ratio
• Earnings per share (EPS)
• Price/earnings ratio (PEG ratio)
• Price-to-book ratio (P/B)
• Cash flows
Fundamental analysis looks at how financially stable a company is and how likely it is to remain so during a changing economic environment.
Technical analysis, on the other hand, is more concerned with how things like momentum can affect a stock’s prices day to day or even hour to hour. This type of analysis considers how likely a particular trend is to continue.
Considering both can help you decide which cyclical stocks may be beneficial for achieving your short- or long-term investment goals.
The Takeaway
Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves. Cyclical stocks could be a good addition to your portfolio if you’re interested in value stocks, or you want to diversify with companies that may offer higher returns in a strong economy.
Investing in cyclical stocks does have its pros and cons, however, like investing in just about any other type or subset of securities. Investors should make sure they know the risks, and consider talking to a financial professional before making a decision.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What are the four cycles of the stock market?
The market generally moves through four cycles: Accumulation, markup, distribution, and markdown, which may also be called trough, expansion, peak, and contraction. Note that it may take years for a single market cycle to complete.
What is the definition of “cyclical stock?”
Cyclical stocks are stocks that tend to follow trends in the broader economic cycle, with returns fluctuating as the market moves.
What are some examples of cyclical stocks?
Cyclical stocks may be shares of companies in industries such as travel and tourism, restaurants and food service, certain facets of manufacturing, retail, entertainment, or construction.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Most investors are familiar with ordinary exchange-traded stocks, but there’s another equity category known as over-the-counter stocks (OTC) — which aren’t necessarily available on public exchanges like the New York Stock Exchange (NYSE) or Nasdaq.
Rather, OTC stocks are traded through a broker-dealer network, known as OTC markets — which can include other types of securities, as well. The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers that engage in OTC trading, but in general OTC markets are less transparent, and less regulated than public exchanges.
OTC stocks may include companies that are too small to trade on public exchanges, as well as some types of foreign securities, bonds, and derivatives.
Key Points
• Over-the-counter stocks are generally not available to trade on public exchanges, but some can be traded OTC as well as being listed on a national exchange.
• OTC stocks are traded through broker-dealer networks, also called OTC markets or Alternative Trading Systems (ATS).
• OTC markets are not limited to OTC stocks, but may include other types of securities: e.g., derivatives, corporate bonds, forex, and more.
• Certain OTC companies may be too small, or may not meet the criteria to trade on public exchanges.
• OTC markets tend to be less regulated than the public markets, and therefore less transparent, which can increase the risk of OTC trading.
What Are OTC Stocks?
As mentioned, an OTC stock is one that trades outside of a traditional public stock exchange. Although some OTC stocks may be available to trade either way.
Some OTC-traded stocks are exchange-listed, and some are unlisted (because they may not meet the criteria for the exchange).
A public stock exchange — like NYSE or Nasdaq — is a closely regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange.
Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer which typically relies on an Alternative Trading System, or ATS, to place trades) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but were later delisted.
How to Buy OTC Stocks
Investors interested in purchasing OTC stocks may not need to change their investing strategy much, because depending on the exchange or platform they use to buy listed investments, they may be able to buy OTC stocks in much the same way.
Again, this will largely depend on the platform being used, but many — but not all — exchanges or platforms allow investors to trade OTC stocks. This can be done by searching for the OTC stock on the platform and placing an order. Investors may need to know the specific stock ticker they’re looking for, however, so there may be a bit of initial homework involved.
Types of OTC Securities
OTC trading tends to focus on equities, i.e. stocks.
One common type of stock available OTC is penny stocks, which tend to be higher risk. These small- or even micro-cap companies have less transparency because they don’t have to meet certain requirements for public exchanges. In addition, they tend to trade at low volumes, which makes these shares less liquid, and contributes to volatility.
But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:
Altogether, there are thousands of securities that trade OTC. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on U.S. exchanges).
Companies that trade over the counter may report to the SEC, though not all of them do.
Types of OTC Markets
In the U.S., the majority of over-the-counter trading takes place on networks operated by OTC Markets Group.
This company runs the largest OTC trading marketplace and quote system in the country (the other main one is the OTC Bulletin Board, or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.
OTC Markets Group organizes OTC stocks and securities into three distinct markets:
• OTCQX
• OTCQB
• Pink Sheets
OTCQX
OTCQX is the first and highest tier, and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records.
Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.
OTCQB
The middle tier is designed for companies that are still in the early to middle stages of growth and development. These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements, and not be in bankruptcy.
Pink Sheets
The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange.
Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.
Pros and Cons of OTC Trading
Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they deliver above-average returns.
When considering OTC stocks, it’s important to understand how the potential positives and negatives may balance out — if at all. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.
Trading OTC Stocks: Pros and Cons
OTC Stock Trading Pros
OTC Stock Trading Cons
Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO.
Micro-cap stocks and nano-cap stocks that trade OTC may lack a demonstrated performance track record.
Investing in penny stocks can allow you to take larger positions in companies.
Taking a larger position in a penny stock could amplify losses if its price declines.
OTC may appeal to active traders who are more interested in current pricing trends than fundamentals.
Limited information can make it difficult to assess a company’s financials and accurately estimate its value.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from public exchanges.
OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position.
The Takeaway
OTC stocks are those that trade outside of traditional exchanges like the NYSE or Nasdaq, and rely on a network of broker-dealers to conduct trades. The OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency.
If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on, and how much money you’re willing to invest when trading stocks. Having a baseline for both can help you to manage risk and minimize your potential for losses.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
How do OTC stocks differ from stocks listed on major exchanges?
OTC stocks aren’t listed on major U.S. stock exchanges. They can still be traded via broker dealer networks; but how they’re listed (or not listed) is the primary differentiator.
How can I buy or sell OTC stocks?
Many investors can use their preferred brokerage or platform to buy and sell OTC stocks. Not all brokerages or investment platforms allow investors to do so, but many do, and trading them often involves searching for the appropriate ticker and executing a trade.
Are there any specific regulations or reporting requirements for OTC stocks?
There are reporting standards for OTC stocks, but those standards are not as stringent as listed stocks. Depending on the OTC market on which an OTC stock trades, more or less reporting may be required.
What are the main factors to consider when researching OTC stocks?
Investors should consider many factors in the OTC market, but among them are volatility, liquidity and trading volume, and applicable regulations. These three factors may have the biggest impact on how an OTC stock performs going forward, though that’s not guaranteed.
Are there any restrictions or limitations on trading OTC stocks?
The OTC markets don’t usually come with many restrictions. But public exchanges, brokerages, or platforms might not permit investors to trade OTC stocks or securities. In that case, investors can look for another platform on which to execute trades that does allow OTC trading.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/JohnnyGreig
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. This should not be considered a recommendation to participate in IPOs and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation. New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For more information on the allocation process please visit IPO Allocation Procedures.
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Alternative investments exist outside of traditional asset classes like stocks, bonds, and cash. Alternatives include assets such as commodities, infrastructure, collectibles, real estate, cryptocurrency, and other securities that generally have a low correlation with traditional assets.
While alts are typically higher risk, they can add diversification to a portfolio, which may help mitigate risk long term.
Some alts may provide higher returns compared to stocks and bonds, as well as the opportunity to earn passive income. But again, these are higher-risk instruments that tend to be illiquid and opaque. In addition, alts are typically subject to more complicated tax treatment.
Key Points
• Alternative investments include assets other than stocks, bonds, and cash, such as collectibles, commodities, derivatives, real estate, private equity, venture capital, cryptocurrency, and more.
• Alternative investments may provide portfolio diversification, as they often have a low correlation with traditional asset classes.
• Alternative investments have the potential to generate higher risk-adjusted returns compared with traditional assets, though this also comes with higher risk.
• Alternative investments tend to be illiquid, not as transparent as other financial assets, and may include the risk of total loss.
• You can invest in alternative investments through mutual funds, ETFs, interval funds, REITs, MLPs, or by working with an experienced asset manager.
What Are Alternative Investments?
Alternative investments — commonly known as alts — are those that fall outside conventional investment categories such as stocks, bonds, and cash. Examples of alternative investments include a wide variety of securities, as well as tangible assets such as commodities, foreign currencies, cryptocurrency, real estate, art and collectibles, and more.
Alts typically have a lower correlation with traditional asset classes, meaning they tend to move independently of assets like stocks and bonds, and thus they may provide investment portfolio diversification.
Alts also have the potential to generate higher returns when compared to stocks and bonds, and some are structured to provide passive income to investors. But understanding what alternative investments are means knowing the fact that these are typically higher-risk assets, which can be illiquid, lightly regulated and opaque (meaning it’s harder to track the actual value of some types of alternatives).
Alts used to be accessible mainly to high net-worth and accredited investors, but now they’re available to a range of investors, including self-directed trading, thanks to the emergence of vehicles such as mutual funds and ETFs that include various alts and alternative strategies.
Often there is little public data available regarding price changes or asset appreciation or depreciation, making it difficult to assess historical performance.
💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.
Alternative investments, now for the rest of us.
Explore trading funds that include commodities, private credit, real estate, venture capital, and more.
What Are the Main Categories of Alternative Investments?
The following list encompasses some common types of alternative investments and alternative strategies available to investors today. Some alternative investment categories may lend themselves to thematic investing, as you’ll see here.
Real Assets
1. Real Estate
• Summary: You can invest in real estate by owning rental property, investing in commercial real estate, industrial real estate, healthcare facilities, and more. Investors can also invest in Real Estate Investment Trusts, or REITs, which offer dividend payouts.
• Pros and cons: Although real estate tends to hold its value over time, there are no guarantees, and markets can be volatile. In addition, properties can be vulnerable to a host of factors including business trends, land values, interest rate risk, climate risk, and more.
2. Farmland and Timberland
• Summary: Like many types of property, farmland and timberland tend to hold their value over time — as long as they remain productive. This type of property can be similar to commodities in that there is potential profit in the products that come from the land (e.g., produce and timber).
• Pros and cons: Owners of farmland can lease out the land to earn income, which can be profitable for investors. The potential downside of investing in farmland and timberland are the environmental and weather-related risks that can impact both the value of the land and its productivity.
3. Infrastructure
• Summary: Infrastructure refers to the physical structures that economies depend on: roads and highways, bridges and tunnels, energy pipelines, and more. Municipal bonds are one way to invest in infrastructure, as are some types of REITs (real estate investment trusts).
• Pros and cons: As a non-cyclical type of asset, infrastructure investments may offer the benefit of less exposure to market risk factors, steady cash flows, and low variable costs. The potential risks of infrastructure investments include political and environmental factors that can impact or delay the execution of a project.
4. Commodities (e.g., Gold, Oil, Grain)
• Summary: Commodities are raw materials that include agricultural products (e.g. grain, meat); precious metals such as gold, silver, copper; energy (including renewables), and more. Generally, investors participate in commodity trading using futures contracts, index funds, mutual funds, or ETFs.
• Pros and cons: Some investors consider commodities a good hedge against inflation. In addition, because commodities are tangible assets, these products tend to have an intrinsic value. However, commodities can suffer from any number of unexpected risk factors, from weather conditions to supply chain breakdowns and more.
• Summary: There are different types of private equity strategies. Some involve buying a significant stake in a private or public company, with the aim of restructuring it for greater profitability. Other strategies include venture capital investments in start-up or early stage organizations.
Because PE is a high-stakes endeavor, these opportunities are generally available to high net-worth and accredited investors. Now, however, retail investors can potentially invest in private equity funds through vehicles such as interval funds.
• Pros and cons: Private equity is considered a high-risk investment, but if a private company goes public or gets acquired, these investments may perform well. The risk with private equity investments is that these are often focused on distressed companies, with a complex track record.
6. Private Credit
• Summary: Private credit involves direct loans made to companies from non-bank entities. Private credit can be a more expensive way to borrow, but it can be faster for the companies needing capital; for investors it offers the potential for generally higher interest payments.
• Pros and cons: Private credit funds tend to see greater inflows when the stock market is underperforming, and they usually pay higher rates than conventional fixed income instruments. The risk here is that most PC funds offer only quarterly redemptions — so they’re quite illiquid — and they can be vulnerable to defaults.
7. Venture Capital
• Summary: Venture capital investing is considered a subset of private equity, as noted above. VC investors typically want to put capital into startups and other early stage companies that show growth potential.
While VC investing used to require substantial industry experience, and in some cases accredited investor status, today investors can buy a slice of startup or private companies, through equity crowdfunding platforms (which differ from traditional crowdfunding in that investors own equity in the company) and interval funds, a type of closed-end fund that typically focuses on illiquid and alternative assets.
• Pros and cons: VC investing can be risky because not only is your capital locked up for a longer period of time, if the company fails, investors may lose all of their money. On the other hand, if a startup does well, investors may see a significant profit.
• Summary: Works or art and other types of collectibles (e.g., wine, jewelry, antiques, cars, rare books) can be considered investments in that these objects may increase in value over time. But art and collectibles include an aspect of connoisseurship that can be rewarding as well. The potential for a personal reward is important, as the financial side of these assets is hard to predict.
For those without the means to acquire some of these valuables, it’s possible to invest in fractional shares of art, or in shares of an art-focused fund.
• Pros and cons: Investing in art or collectibles may provide a hedge against inflation or other market factors. That said, the price of upkeep, insurance, and maintenance of the actual items can be considerable. And while some pieces may gain value over time, art and collectibles are subject to changing trends and tastes. Fraud is another risk to consider.
9. Hedge Funds
• Summary: Hedge funds offer qualified investors access to alternative investing strategies, like arbitrage, leveraged trades, short-selling, and more, at a steep cost. Hedge funds aren’t as heavily regulated as other types of funds, so they’re able to make riskier investments and lean into aggressive strategies, with the goal of delivering outsized returns.
• Pros and cons: While hedge fund managers sometimes deliver a profit, they typically charge double-digit fees and require high investment minimums, often starting in the seven figures. In addition, most hedge funds are only open to accredited investors. Today, retail investors may be able to access mutual funds, ETFs, funds of funds, or other vehicles that employ hedge-fund-like strategies.
10. Foreign Currencies
• Summary: The foreign currency market, or forex, is an over-the-counter (OTC) global marketplace, which is the largest financial market in the world. It’s open 24/7, and thus highly liquid, allowing investors to trade currency pairs at all times. Most forex traders use leverage in order to trade currencies.
• Pros and cons: Currency trading is known for its volatility, and currency traders often make leveraged trades, assuming a high degree of risk. Retail investors may find it potentially less risky to invest via mutual funds, ETFs, foreign bond funds, and even certain types of CDs (certificates of deposit). That said, the underlying volatility of most currencies will influence the performance of these investments as well.
Cryptocurrency
• Summary: Cryptocurrency, such as bitcoin, ethereum, and countless others, are types of digital currencies that are maintained through blockchain technology, and are not subject to a centralized bank in the way that traditional currencies are.
First introduced in 2009, when bitcoin was created, crypto has proven to be highly volatile, subject to digital theft and fraud, and other risk factors. That said, many traders find the possibility of higher returns and less regulation appealing.
• Pros and cons: When crypto first started, traders either bought or earned digital coins via digital mining and staking processes specific to certain coins. Today, it’s possible to invest in crypto through exchange-traded products, or ETPs (similar to ETFs, but not as heavily regulated), as well as stock in companies that provide exposure to crypto-related products, such as mining equipment or blockchain technology.
While these new crypto investment products may provide retail investors with some protection versus buying cryptocurrencies outright on an unregulated crypto exchange, they are still vulnerable to all the potential risks crypto brings.
💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.
How Can You Access Alternative Investments?
As mentioned above, alternative investments used to be limited to institutional investors and high net-worth investors, but they’re now available to retail investors through mutual funds, ETFs, ETPs, and sometimes even through companies’ IRAs.
Once you’ve identified the types of alternative investments that would suit your goals, your risk tolerance, and your plan (e.g., you might prefer commodities to owning art), you can look for the types of investment vehicles that would help you buy into these alternative asset classes.
Through Publicly Traded Funds (ETFs and Mutual Funds)
If a certain type of alternative asset appeals to you, it’s likely you can gain exposure to it through a type of mutual fund, ETF, exchange-traded product, or other type of pooled investment fund.
These vehicles offer some diversification because they hold so many different investments. And because they fall under SEC and FINRA regulations, these products tend to be more liquid and more transparent in comparison to some alts themselves.
Through Real Estate Investment Trusts (REITs)
A popular way to access the real estate market is through real estate investment trusts (REITs). Buying shares of a REIT allows investors to gain exposure to many types of real estate without having to own the physical property. The REIT owns and maintains the property — whether an office park, health facility, storage units or other — collecting rental income (or mortgage interest).
Investors may benefit if the REIT gains value. In addition, REITs provide passive income because they are required to pay out 90% of their profits in the form of dividends.
Through Specialized Online Platforms
Because alts can be harder to access for many individual investors — owing to higher minimums or other restrictions — a number of specialized online platforms have emerged that offer retail investors exposure to certain types of alts.
Some platforms enable investments in art, for example via fractional art investing. Other sites may offer access to farmland investments, collectibles, fine wines, and other types of alternatives.
Note that investing in alts using specialized channels like these typically require higher minimums and many also come with liquidity restrictions.
What Are the Pros and Cons of Alternative Investments?
In sum, alternative investments are certainly worth considering given their potential advantages, but it’s important to keep in mind the possible disadvantages to make the best choices in light of your own goals and risk tolerance.
Potential Benefits of Alts (e.g., Diversification)
• May offer the potential for higher risk-adjusted returns.
• Are typically not correlated with traditional stock and bond markets, so they may help diversify a portfolio and mitigate risk.
• May have the potential to deliver passive income.
• Some alts may hedge against inflation or interest rate fluctuations.
• May appeal to an individual’s personal interests: e.g., art, wine, memorabilia.
Potential Risks of Alts (e.g., Illiquidity, High Fees)
• Are often higher risk, or can be subject to greater volatility.
• Can be less liquid than traditional investments due to limited availability of buyers and lack of a convenient market.
• Often limited to high net-worth and accredited investors.
• May have higher minimum investment requirements and higher upfront fees.
• May have less available public data and transparency about performance, making it difficult to determine a financial asset’s value.
Key Considerations When Investing in Alts
Alternative investments are complex, and while the risk may be worth the potential reward for some investors, there are some additional caveats to bear in mind about these assets.
How Are Alternative Investments Taxed?
Unlike conventional asset classes, which are typically subject to capital gains tax or ordinary income tax, alts can receive very different tax treatments, even when investing in these assets via a mutual fund or ETF.
When investing in alts, it’s wise to involve a professional to help address the tax-planning side of the equation.
What Role Should Alts Play in Your Portfolio?
Remember, because alts don’t generally move in sync with traditional asset classes, they may offset certain risk factors. And while alts come with risks of their own, including volatility and lack of transparency, within the context of your portfolio as a whole, alts, and funds that invest in alts, may enhance returns. Some alts can provide passive income as well as gains.
It’s important to know, however, that alternative investments are higher risk, tend to be more illiquid, and less transparent. As such, alts should typically only be one part of your portfolio to complement other assets. Deciding on the right percentage for you depends on your risk tolerance.
The Takeaway
Alternative investments have the potential for high returns and may offer portfolio diversification. The scope and variety of these investments means investors can look for one (or more) that suits their investing style and financial goals. Unlike more conventional investments, alts tend to be higher risk, more expensive, and subject to complex tax treatment.
It’s important to research and do due diligence on any alternative investment in order to make the best purchasing decisions and reduce risk. While some alternative investments are less accessible, others can be purchased through vehicles such as mutual funds and ETFs.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
Invest in alts to take your portfolio beyond stocks and bonds.
FAQ
Are ETFs considered alternative investments?
Generally no. For the most part, exchange-traded funds (ETFs) are passive investments — meaning they track an index — and typically that index is for a conventional asset class like stocks or bonds. That said, some ETFs track niche parts of the market, including certain types of alternative strategies, including options, long-short strategies, managed futures, real estate investment trusts (REITs), and more.
Are alternative investments only for wealthy or accredited investors?
No. While some alternative assets are mainly available to accredited or high net-worth investors (e.g., hedge funds, private equity), many are accessible to retail investors who are willing to try new markets and new instruments (e.g., forex, derivatives) or access these strategies via mutual funds or ETFs.
Are cryptocurrencies considered alternative investments?
Yes, cryptocurrencies are typically less correlated with traditional assets like stocks and bonds. While crypto remains highly volatile, these digital currencies have become more widely available through vehicles such as ETFs.
How much of my portfolio should I allocate to alternatives?
Deciding how much of your portfolio to allocate to alts is largely dependent on your personal risk tolerance. Owing to the potential for steep losses, investors may want to allocate a small percentage, and carefully select the type of alternative asset that best suits their goals.
What is the most common type of alternative investment for retail investors?
Real estate, particularly dividend-paying REITs, are among the most common types of alts for retail investors. This asset class is well established, and while all property can be subject to risks, real estate investments offer the potential for longer-term growth that may provide diversification. And REITs, which are required to pay dividends, offer the potential for passive income.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.
All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.
SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.
