MoneyHL Archives | Page 34 of 91

Aug

2023

What Is Book Value Per Share (BVPS)?

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

One of the most popular and trusted forms of fundamental analysis is Book Value Per Share (BVPS), or a company’s “book value.” Book value per share is an accounting metric that calculates the per-share value of a company’s equity.

The book value per share of an undervalued stock is higher than its current market price, so book value per share can help investors appraise a stock price.

Knowing what book value per share is, how to calculate it, and how it differs from other calculations, can add yet another tool to an investor’s tool chest.

What Is Book Value Per Share?

Book Value per Share (BVPS) is the ratio of a company’s equity available to common shareholders to the number of outstanding company shares. This ratio calculates the minimum value of a company’s equity and determines a firm’s book value, or Net Asset Value (NAV), on a per-share basis. In other words, it defines the accounting value (i.e. book value) of a share of a company’s publicly-traded stock.

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

Book Value Per Share vs Market Value Per Share

The Book Value Per Share provides information about how the value of a company’s stock compares to the current Market Value Per Share (MVPS), or current stock price. For example, if the BVPS is greater than the MVPS, the company’s stock market may be undervaluing a company’s stock.

The market value per share is forward-looking, since it’s based on what investors think a company should be worth, while book value per share is an accounting measure that uses historical data.

What Does Book Value Per Share Tell You?

Commonly used by stock investors and analysts, the Book Value Per Share (BVPS) metric looks at a company’s stock price to determine whether it’s undervalued compared to the stock’s current market price. An undervalued stock will have a BVPS higher than its current stock price.

If the company’s BVPS increases, investors may consider the stock more valuable, and the stock’s price may increase. On the other hand, a declining book value per share could indicate that the stock’s price may decline, and some investors might consider that a signal to sell the stock.

Book Value Per Share also theoretically reflects what shareholders would receive in a company liquidation after all its assets were sold and all of its liabilities paid. However, because assets would hypothetically sell at market value instead of historical asset values, this may not be an entirely accurate measurement.

If a company’s share prices dip below its BVPS, the company can potentially be vulnerable to a takeover by a corporate raider who could buy the company and liquidate its assets risk-free. Conversely, a negative book value indicates that a company’s liabilities exceed its assets, making its financial condition “balance sheet insolvent.”

Book Value Per Share solely includes common stockholders’ equity and does not include preferred stockholders’ equity. This is because preferred stockholders are ranked differently than common stockholders in the event the company is liquidated. If a corporate raider intends to liquidate a company’s assets, the preferred stockholders with a higher claim on assets and earnings than common shareholders are paid first and that amount gets deducted from the final shareholders’ equity distributed among common stockholders.

How to Calculate Book Value Per Share

An investor can apply BVPS to a stock by analyzing the company’s balance sheet. Specifically, an investor will need total asset value, cost of acquiring an asset, and accumulated depreciation of corporate assets which helps provide the most accurate BVPS figure.

Whereas some price models and fundamental analyses are complex, calculating book value per share is fairly straightforward. At its core, it’s subtracting a company’s preferred stock from shareholder equity and dividing that sum by the average amount of outstanding shares.

Book Value Per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding Common Shares
Shareholders’ Equity = Total equity of all shareholders.
Total Outstanding Common Shares = Company’s stock currently held by all shareholders, including blocks held by institutional investors and restricted shares owned by preferred stockholders. This number may fluctuate wildly over time.

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

Example of Book Value Per Share

Company X has $10 million of shareholder’s equity, of which $1 million are preferred stocks and an average of 3 million shares outstanding. With this information, the BVPS would be calculated as follows:

BVPS = ($10,000,000 – $1,000,000) / 3,000,000
BVPS = $9,000,000 / 3,000,000
BVPS = $3.00

How to Increase Book Value Per Share

A company can increase its book value per share in two ways.

Repurchase Common Stocks

A common way of increasing BVPS is for companies to buy back common stocks from shareholders. This reduces the stock’s outstanding shares and decreases the amount by which the total stockholders’ equity is divided. For example, in the above example, Company X could repurchase 500,000 shares to reduce its outstanding shares from 3,000,000 to 2,500,000.

The above scenario would be revised as follows:

BVPS = ($10,000,000 – $1,000,000) / 2,500,000
BVPS = $9,000,000 / 2,000,000
BVPS = $4.50

By repurchasing 1,000,000 common shares from the company’s shareholders, the BVPS increased from $3.00 to $4.50.

Increase Assets and Reduce Liabilities

Rather than buying more of its own stock, a company can use profits to accumulate additional assets or reduce its current liabilities. For example, a company can use profits to either purchase more company assets, pay off debts, or both. These methods would increase the common equity available to shareholders, and hence, raise the BVPS.

The Takeaway

There are many methods that investors can use to evaluate the value of a company. By leveraging useful and insightful formulas such as a company’s Book Value Per Share, investors can determine a company’s value relative to its current market price. While it has limitations, the BVPS can identify companies that are undervalued (or overvalued) according to core fundamental principles, and it’s a relatively straightforward calculation that even beginner investors can use.

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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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Aug

2023

What Is Gross Spread?

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

The term “gross spread” refers to an important element of the initial public offering (IPO) process: Gross spread is the money underwriters earn for their role in taking a company public.

When a company IPOs, or “goes public,” it releases its shares onto a public stock exchange, an undertaking that demands a tremendous amount of work behind the scenes. That work involves bankers, analysts, underwriters, and numerous others. All of that work must be compensated, which is where the gross spread — also called the underwriting spread — comes into play.

How Gross Spread Works

The gross spread refers to the cut of the money that is paid to the underwriters for their role in taking a company public. In effect, it’s sort of like a commission paid to the IPO underwriting team. But the underwriting spread isn’t a flat fee, but a spread in the sense that it represents a share price differential.

Underwriters

Underwriters are common players in many facets of the financial industry. It’s common to find underwriters working on mortgages, as well as insurance policies.

When it comes to IPOs, underwriters or underwriting firms work with a private company to take them public, acting as risk-assessors, effectively, in exchange for the underwriters spread. Their job is to evaluate risk and charge a price for doing so.

Recommended: What Is the IPO Process?

The Role of Underwriters in the IPO Process

These IPO underwriters generally work for an investment bank and shepherd the company through the IPO process, ensuring that the company covers all of its regulatory bases.

The underwriters also reach out to a swath of investors to gauge interest in a company’s forthcoming IPO, and use the feedback they receive to set an IPO price — this is a key part of the process of determining the valuation of an IPO.

In order to generate compensation for all this work, the underwriters typically buy an entire IPO issue and resell the shares, keeping the profits for themselves. So, the underwriters set the IPO price, buy the shares, and — assuming the shares increase in value once they become publicly available — the underwriters generate a profit from reselling them, the same way you would selling the shares of an ordinary stock that had risen in value.

For companies that are going public, the benefit is that they’re essentially guaranteed to raise money from the IPO by selling the shares to the underwriters. The underwriters then sell the shares to buyers they have lined up at a higher price in order to turn a profit. That difference in price (and profit) is the gross spread.

For the mathematically minded, the gross spread — basically the IPO underwriting fee — would be equal to the sale price of the shares sold by the underwriter, minus the price of the shares it paid for the shares.

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

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Gross Spread & Underwriting Costs

The gross spread, for most IPOs, can range between 2% and 8% of the IPO’s offering price — it depends on the specifics of the IPO. There can be many variables that ultimately dictate what the gross spread ends up being.

The gross spread also comprises a few different components, which are divided up by members of the underwriter group or firm: The management fee, underwriting fee, and concession. The underwriters typically split the gross spread, overall, as such: 20% for the management fee, 20% for the underwriting fee, and 60% for the concession. More on each below:

Management fee

The management fee, or manager’s fee, is the amount paid to the leader or manager of the investment bank providing underwriting services. This fee essentially amounts to a commission for managing and facilitating the entire process. It’s also sometimes called a “structuring fee.”

Underwriting fee

The IPO underwriting fee is similar to the management fee in that it is collected by and paid to the underwriters for performing their services. Again, this is more or less a commission that is taken as a percentage of the overall gross spread and divided up by the underwriting teams.

Concession

The concession, or selling concession, is generally the compensation underwriters get for managing the IPO process for a company. So, in this sense, the concession is a part of the gross spread during the IPO process and is, effectively, the profits earned by selling shares when the process is complete. It’s divided up between the underwriters proportionately depending on the number of shares the underwriter sells.

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Examples of Gross Spread

Here’s an example of how gross spread may look in the real world:

Company X is planning to IPO, and its shares are valued at $30 each. The underwriters working with Company X on its IPO purchase the full slate of shares prior to the IPO, and then go off and sell the shares at $32 each to investors and the general public.

In this case, the gross spread would be equal to the difference between what the underwriters paid Company X for the shares, and what they then sold the shares for to the public — $32 – $30 = $2.

Or, to express it as a ratio, the gross spread is 6.7%. More on the ratio calculation below.

Gross Spread Ratio

As mentioned, the gross spread can be expressed or calculated as a ratio. Using the figures above, we’d be looking to figure out what percentage $2 is (the gross spread) of $30 (the share price sold to the underwriters).

So, to calculate the ratio, you’d simply divide the gross spread by the share price — $2 divided by $30. The calculation would look like this:

$2 ÷ $30 = 0.0666

The figure we get is approximately 6.7%. Also note that the higher the ratio, the more money the underwriters (or investment bank serving as the underwriter) receives at the end of the process.

IPO Investing With SoFi

Though the gross spread, or underwriters spread, is not a well-known aspect of the IPO process, it’s relatively straightforward. Underwriters, who shepherd a company through the IPO process, ultimately buy the initial shares from the company at one price, and sell them to the public at the IPO at a higher price. The spread between the two is considered the gross spread, or the compensation the underwriting team earns for all their work.

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

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

FAQ

What is meant by the underwriting spread?

The underwriting spread is another term for the gross spread. Underwriters pay issuers, or an issuing company, for a company’s shares prior to the IPO. The underwriting firm then turns around and sells shares to investors. The difference (expressed as a dollar amount) that the underwriter pays the issuer and that it receives back from selling the shares during an IPO is the underwriting spread.

What are gross proceeds in an IPO?

Gross proceeds, in relation to an IPO, refers to the total aggregate amount of money raised during the public offering. This is all of the money raised by investors during the IPO.

What is a typical underwriting spread?

As underwriting spreads are usually expressed as dollar amounts, the typical underwriting spread can vary depending on several variables in the IPO process — including share price, share volume, etc. But in general, it can amount to between 3.5% and 7% of gross proceeds during an IPO.

Photo credit: iStock/bankrx

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Aug

2023

How to Pay For Online College

By LeeMarie Kennedy | Student Loans, student_loan | Comments Off

More and more people are considering degrees from accredited schools with “distance learning” options. These prospective students might be wondering how much these colleges cost compared to in-person options, how credible these online degrees are, what steps should be taken to apply to them, and whether there are options for student loans or financial aid.

The short answer: online degrees are increasingly credible, competitively priced, have a similar application process as in-person colleges, and can be paid for with a wide range of financial aid, federal student loans, and even private student loan options. In fact, some might even pay you to attend.

A Little Bit About Distance Learning

Online college falls under the umbrella of “distance learning”—a form of education conducted outside the traditional in-person classroom and facilitated with the use of several different tools and technologies. Many distance learning programs allow students to complete courses in an “asynchronous” format, aka at their own pace and on their own schedule.

Some online colleges also incorporate “synchronous” learning methods like virtual classrooms and video conferencing for meeting during a designated class time. Depending on which format a student chooses, they can create their own online learning experience as part of their college education.

How Credible Are Online Degrees?

In previous decades, the jury may have been mixed on whether online degrees were considered as credible as their in-person counterparts. But with the advancement of global technology and the onset of digital transformation, online colleges have become more widely recognized as institutions of high-quality education.

According to Northeastern University’s Online Education survey, 61% of HR leaders believe online college credentials are equally credible as those completed in-person. This included both degrees and certificates.

How Much Does The Average Online College Cost?

According to the U.S. News & World Report, the average cost of tuition for an online bachelor’s degree program is $40,491. For in-state students attending public online colleges, the average cost for a bachelor’s degree is $38,496. For out-of-state students, the cost is $54,183. And online bachelor’s degrees from private colleges cost an average of $60,593.

This, of course, is simply the average. In some cases, online college can cost even more than in-person programs. And, in other cases, online colleges can actually pay students to attend (more on that below).

How Do I Apply For Online College?

The process of applying to an online college is similar to that of a traditional in-person college or university. Depending on which school the prospective student chooses, there should be detailed application and enrollment instructions on the website.

Each college will have its own unique admissions policies and application instructions, with some adhering to set application deadlines and others offering “rolling admissions” where students can apply at any time.

Researching deadlines and requirements in advance can be a prudent way to approach the online college application process and provide exactly what the admissions team wants.

Are There No-Cost Online Colleges?

Yes. There are a few colleges and universities that offer tuition-free online classes with a variety of work study programs, scholarships, and other forms of financial aid. A few of those institutions include:

•   Alice Lloyd College
•   Arizona State University
•   Barclay College
•   Brown University
•   City College of San Francisco
•   College of the Ozarks
•   Community College of Rhode Island
•   Curtis Institute of Music
•   Deep Springs College
•   Louisiana Free Tuition

How Do I Pay For College If I Have No Money?

There are several ways to pay for college, even if the applicant has little-to-no means of funding:

•   Applying for scholarships is one way to pay for online college without having any money. There are several resources available for prospective college students seeking scholarships and, unlike student loans, repayment is not required.
•   Financial aid helps prospective students secure funds for online college in the form of grants, scholarships, work-study programs, and federal student loans.
•   Getting an extra gig could be a great way to accumulate some extra cash to subsidize online college costs.
•   Prospective students can see if they qualify for a private student loan online. Once they’ve applied for a student loan for online college, there are many different student loan repayment options to help them tackle the tuition debt on their own terms.

Are There Student Loans For Online Schools?

When online education first began, student loans weren’t offered by the government to cover their costs. But today, federal student loans are offered for online colleges that are accredited by the US Department of Education. Contacting the university’s financial aid office prior to enrollment is the best way to check on eligibility.

Outside of federal student loans, private student loans are another way to potentially pay for online college. With private student loans, each lender will have their own eligibility requirements, terms and conditions, and borrowers must agree to these parameters and complete on-time payments to avoid any fees or penalties associated with account delinquency. Still, there are several smart ways to pay off student loans as well as student loan refinancing options if the loan’s interest rates are unreasonably high.

What About Online Colleges That Accept FAFSA?

If you’re wondering, does FAFSA® cover online classes?, the answer is yes. The Free Application for Federal Student Aid (FAFSA) allows prospective students to apply for financial aid for online classes much like they would an in-person university. All they have to do is fill out the form online, print and mail a paper copy, or request a paper copy be sent by mail and returned.

What Types of Federal Student Loans are Available For Online College?

Prospective students might consider consulting with their online college’s financial aid office before deciding which type of federal student loan to apply for, but many students opt for one of the following types of Federal Direct student loans:

•  Federal Direct Subsidized loans help students who qualify for financial need and are attending traditional four year colleges or universities, community colleges, or technical schools. The federal government will pay the loan’s interest while the borrower is in school, during the six-month grace period after graduation, and in the event of student loan deferment.
•  Federal Direct Unsubsidized loans help undergraduate, graduate, and professional school students cover college costs without requiring a demonstration of financial need. However, borrowers are responsible for paying back all the interest accrued on the loan from the time they start attending college onward (although they aren’t required to start making payments until after they graduate).
•  Direct PLUS loans are unsubsidized loans issued for graduate or professional students as well as parents of undergraduate students who are helping them pay for college.
•  Direct Consolidation loans are a way to combine different federal student loans into one single loan so the borrower can commit to one monthly payment under one loan servicer.

How Can I Get Private Student Loans?

For prospective students seeking an alternative to federally-backed student loans, a private student loan is another way to pay for online college. Depending on the lender, there are several options for interest rates, terms, conditions. And in certain circumstances where borrowers have difficulty paying back the private student loan, negotiations might be made with the lender for deferment, forbearance and even refinancing.

With SoFi Private Student Loans, paying for online college just got a whole lot more convenient. Qualifying borrowers can get competitive rates, apply easily online, find flexible repayment options, avoid pesky fees, and get exclusive members-only rate discounts.

The Takeaway

Online college is a form of distance education that allows students to engage in self-regulated learning and acquire a degree outside the traditional in-person university setting. Degrees from online college degrees are considered increasingly credible by employers and HR leaders.

There are several student loan and financial aid options for online college attendees, including federally-backed student loans, financial aid, scholarships, work-study programs, grants and private student loans.

SoFi Private Student Loans help people pay for school with a simple online application process, no hidden fees, exclusive rate discounts and flexible repayment options that fit their budget.

Learn more about private student loans offered by SoFi.

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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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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Jul

2023

What Are Blue Chip Stocks?

By Austin Kilham | Financial Independence, Growing Wealth, invest, Investing, Terminology | Comments Off

Blue chip stocks are generally issued by large, well-established companies that have a history of steady growth. These companies are typically financially sound, they’re generally considered lower risk, and many blue chip stocks also pay dividends.

In other words, blue chip stocks are the big, stable ocean liners of the equity markets, not the smaller more volatile jet skis. When you’re constructing a portfolio, you may want to consider these large-cap stocks in the slow-but-steady corner of your equity allocation as part of your diversification strategy.

A Closer Look at Blue Chip Stocks

First, let’s answer the obvious questions: Why blue? Why chips? The origin of the term “blue chip stocks” is believed to originate with the game of poker, where traditionally the blue chips have the highest value.

While there is no fixed definition for blue chips, generally speaking, blue chip stocks are chiefly known for being stable and reliable. Blue chip companies can also share some other characteristics.

Common Traits of a Blue Chip Stocks

• They’re well-known. Blue-chip stocks aren’t limited to a single industry, but can be found in grocery aisles and on entertainment channels. Companies like Disney, Coca-Cola, and IBM are all considered blue chip stocks.

• They’re industry leaders. Often a stock has earned its blue-chip reputation by innovating over time, and becoming a market leader — often being among the top three companies in a given sector.

• They’re worth billions. Many blue chip companies have a market cap of $10 billion or more, but many are larger. Market capitalization is a measure of a company’s value, and it’s calculated by multiplying the share price by the number of shares outstanding.

• They’re well established. Most blue chip stocks are not newcomers. Rather they’ve demonstrated a history of financial stability, which can make them an important part of a defensive investment strategy.

• They’ve weathered different market conditions. Owing to their longer histories, many blue chip stocks have overcome various market challenges, but that does not make them “safe” investments.

• They’re on an index. You’ll often find blue chip stocks listed on the Dow Jones Industrial Average, S&P 500 Dividend Aristocrats, or the Bridgeway Blue Chip 35 Index.

• They pay dividends. Blue chip stocks typically pay out dividends, or a share of the company’s profits, to shareholders.

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10 Historically Blue Chip Stocks

Here are 10 companies that have been historically considered blue chip. This list does not include all blue chips, but is a selection of some that are well known:

• 3M

• Coca-Cola

• UnitedHealth Group

• IBM (International Business Machines)

• Johnson & Johnson

• JP Morgan Chase

• Microsoft

• Procter & Gamble

• UPS (United Parcel Service)

• Walmart

These companies have been around for decades, and because of their consistent performance history, they’re considered blue chip stocks today. You may want to consider them when you’re thinking about portfolio diversification.

In addition, a few newcomers (or relatively new companies) have joined the blue chip party, such as Amazon, Apple, and Alphabet.

Advantages and Disadvantages of Investing in Blue Chip Stocks

Like any investment strategy, blue chip stocks have their potential benefits and drawbacks. Before investing in blue chip stocks, you may want to weigh the positives and negatives of these types of stocks on your overall investment strategy.

Advantages

Blue chip stocks have their fair share of benefits:

• They have a track record. Typically, blue chip stocks have been around for a while and are listed in some of the most well-known stock indexes. Some of these indexes can have stringent rules that only the most financially stable companies could meet.

• They’re big. Many of these companies are global in reach, and have the potential to grow faster, secure bigger loans, and continue to compete in the market. Thus, blue chip stocks may be more stable than smaller companies in their sectors — but with the resources to innovate and maintain their status.

• They can be lower risk. Blue chip stocks are often considered low risk because of their size and market history in the market. Many of them also pay dividends, which benefits investors.

• They’re highly liquid. Because these companies trade frequently, but are typically not volatile, investors can generally be confident in these stocks’ value when selling.

• They’re easy to follow. The companies behind many blue chip stocks tend to be well known, which means announcements and news around them is likely to make the front page of the financial section.

Disadvantages

There’s no such thing as a “sure thing,” especially in investing, and the drawbacks of blue chip stocks prove this point. Here are a few cons to keep in mind when considering blue chips for your portfolio.

• They may fall harder. The old adage “the bigger they are, the harder they fall” may apply here. Just because a blue chip stock has a solid history does not ensure a profitable future.

• Limited growth. Though these companies typically have longevity on their side, they are often past their prime growth years. This is why blue chip companies also have a reputation for being low risk.

• They may be expensive. Blue chip stocks tend to be well-known brands and often a highly desirable part of people’s investment strategies. For that reason, you’re unlikely to get a deal on them.

💡 Quick Tip: How to manage potential risk factors when you invest? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Investing in Individual Blue Chip Stocks

Like a well-balanced meal, investing in blue chip stocks can be one part of a healthy investment strategy. Those looking to make blue chip stocks a part of their balanced investment diet may first consider investing in individual stocks.

If the price per share is too steep for an investor’s budget, they might want to consider fractional share investing, which allows the purchase of a fraction of a stock instead of the whole share, starting at just $5. Restrictions do apply for fractional shares.

Choosing to invest in an individual stock might be a good way to get a feel for the market, or it might be a way to take a more active investment strategy. Either way, a brokerage can handle an investor’s single blue chip stock purchase.

Blue Chip Funds: An Alternative to Individual Stocks

If no individual stock strikes your fancy, but you still want to get into the blue chip game, you might consider investing in index funds or ETFs that focus on blue chip stocks.

Index funds and ETFs typically hold a diversified basket of stocks, often in line with a stock market index that tracks a segment of the market. Choosing an index fund or ETF that tracks large-cap stocks, the S&P 500, or the Dow Jones Industrial average can be one way to invest in a wide range of blue chip companies and add diversification. Investing in a blue chip fund or an ETF is investing in a portfolio of companies that a broker has selected.

The Takeaway

A company’s stock earns a blue chip designation when they have a strong performance history, consistent returns, excellent financials, and they’re considered industry leaders.

For investors who are ready to start investing, blue chip stocks can be a solid choice — but typically not one that’s likely to deliver a lot of growth or big returns. That said, blue chips are often viewed as being conservative. Being conservative can be an important part of an investment strategy, but it’s like a balanced diet. It may not be healthy to eat the same thing day after day, just as it’s not wise to invest only in bigger, more conservative options — but include other investments as well.

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

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Jul

2023

How to Invest in Gold: Tips for 1st Time Gold Investors

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

As you build your investing portfolio, you might wonder: Is gold a good investment? While some investors may be interested in it as a hedge against inflation or market downturns, or to further diversify their portfolio, it’s important to know that investing in gold isn’t simple, especially for first-time investors. One reason is that there are so many ways to invest in gold, each with their own pros and cons.

Why Investors Like Gold

Historically, investors have turned to gold as a way to hedge against the possibility of inflation or events that could negatively impact the equity markets. And while it can be just as volatile as stocks in the short term, gold has historically held its value well over the long term. Even investors who are not particularly concerned about inflation or about calamities affecting the broader market, may turn to gold as a way to diversify a portfolio.

5 Ways to Invest in Gold

For anyone considering investing in this precious metal, it can be helpful to familiarize yourself with the different ways one can invest in gold.

Buy Physical Gold

When thinking of ways to invest in gold, the first image that may come to mind is piles of gold bars in a place like Fort Knox. Those bars are also known as bullion, and it comes in bars that can be as small as a few grams, or as large as 400 ounces. The most common denominations of gold bullion are one- and 10-ounce bars.

For many investors, even the one-ounce bars can be too expensive — roughly $2,200 per ounce in mid 2023. And because the bullion is a physical item, there’s no easy way to own a fraction of a bar. But if you do want to own bullion directly, the first order of business is to find a reputable dealer to buy from, and then look into the costs of delivery and insurance for the asset. Another option if you buy bullion is to pay for storage, either in a large vault or in a safety deposit box at a bank.

Buy Gold Coins

Gold coins offer another way to directly own the shiny yellow metal, in a variety of denominations including half-ounce and quarter-ounce. Well-known gold coins include South African Krugerrands, Canadian Maple Leafs, and American Gold Eagles, which have been known to sell at a premium to their actual gold content among collectors.

While you may be able to buy gold coins at a discount from local collectors or pawn shops, most investors will likely opt for a reputable dealer. As with bullion, it is important to protect this hard asset, either through insurance, or with a vault or safe deposit box.

Buy Gold Jewelry

If you don’t want your gold investment to just sit in a vault, then gold jewelry may be appealing. But it comes with its own considerations. The first is that gold jewelry may not have as much actual gold content as the jeweler claims. Verifying the authenticity of a piece not only protects you, but it will also help when it comes time to sell the piece. One way to do this is to only buy jewelry from reputable dealers, who can also deliver documentation about the piece.

Another point to remember is that a piece of jewelry will also come with a markup from the company that made it, which can make the piece cost as much as three times the value of its metal. And jewelry typically isn’t 100% pure gold — or 24 karats — so it’s important to know the purity and melt value of the jewelry before you buy.

Buy the Stocks of Gold Mining Companies

One way to take advantage of growth in the value of gold with your existing brokerage account that you might want to consider is to buy the stocks of companies in the gold business, including miners and refiners.

While gold stocks tend to go up and down with the price of gold, they may also experience price changes based on the company’s own prospects.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Buy Gold ETFs and Mutual Funds

If the risks or individual mining and refining companies are too much, you may want to consider a gold exchange-traded fund (ETF) or mutual fund. These vehicles — which are available through one’s brokerage account — invest in gold in different ways.

Buy Gold Futures and Options

Experienced investors with some familiarity trading derivatives may consider investing in the gold market through futures and options. These contracts allow the investor to buy or sell gold for an agreed-upon price by a fixed date. To trade these contracts, an investor needs a brokerage account that offers the ability to trade them.

An investment in gold options or futures contracts, however, requires active monitoring. These contracts expire on a regular basis, so investors have to be ready to sell, roll over, or exercise them as gold prices change, and as the contracts reach their expiration dates.

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

What Will Gold Be Worth in 2030?

Predicting the future price of an idiosyncratic and volatile commodity like gold is all but impossible. For instance, back in 2020, gold increased in value by 24.6% in U.S. dollars, and reached all-time highs in a number of currencies, in anticipation of a coming wave of inflation.

In its 2023 In Gold We Trust report, asset manager Incrementum predicted a “showdown in gold prices” and increased demand due to inflation and a possible recession, stating that “investment demand from gold ETFs could tip the gold prices scales.”

One reason why gold investors believe the precious metal may have strong prospects is that the broader economy has been in an inflationary period. One measure of this is the consumer price index (CPI). The latest CPI data in mid-2023 showed that inflation is slowing, but it’s still a concern for consumers and for investors.

The Takeaway

Investors interested in gold typically gravitate toward it as a hedge against inflation or as a means of diversifying their portfolios. Those who want access to this precious metal have some choices: They can buy bullion, coins, jewelry, mining stocks, ETFs, mutual funds, futures, and options.

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Image credit: iStock/LeonidKos
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