SoFi

Saving money is a good thing, but it’s important to find the right kind of account for your cash. Both savings accounts and certificates of deposit (CDs) can be a safe spot to keep your money, but they have differences. A savings account can be more accessible, meaning you can typically withdraw funds at will, while with a CD, you are supposed to let your money sit for an agreed-upon period of time. Also, interest rates may vary.

Depending on your needs and preferences, you may discover that one option is a better fit for you than another. To help you make a decision, read on for details on what these accounts offer and how they differ. Once you know the pros and cons of each, you will likely be better prepared to make a decision.

Certificate of Deposit vs. Savings Accounts

To understand the difference between a CD and a savings account, it’s a good idea to first learn how each type of account works.

What Is a Certificate of Deposit (CD)?

A certificate of deposit (CD) is a specific type of savings account that pays interest. You agree to keep the money on deposit for a specific term, which can range from a few months to several years, and you are promised a specific interest rate (usually but not always a fixed rate). CDs are also known as time deposits for this reason.

The longer the term you choose, the higher the interest rate in many cases. You may also find a promotional CD with a higher than usual rate.

As noted above, you may find some variable rate CDs offered. With these, the interest can fluctuate with the market.

CDs are considered to be a very safe savings option if the CD is set up through a federally insured bank. If a bank has FDIC insurance, you will have up to $250,000 in insurance covering their accounts. That means even if the bank went out of business, you will get your money back as long as the amount doesn’t surpass $250,000.

The downside of CDs is that you basically shouldn’t touch your money for an extended period of time. This is an issue in terms of access. There are some no penalty CDs on the market that don’t charge a CD for pulling money out early. However, typically there are fees involved if you want to remove the funds before the period of time to which you committed. What’s more, when you open a CD, you risk inflation rising faster than the interest you earn on your money.

How Does a CD Work?

Here’s how a certificate of deposit works: You agree that you will leave the money in the account for a set period of time such as six months or three years. In exchange for locking up your funds in the account for that extended period of time, the bank issuing the CD will pay out a certain amount of interest.

You, the CD holder, will be aware of exactly what this payout will be when depositing funds into the CD if it comes with a fixed interest rate. Once the agreed upon period of time is over, you can get your original deposit back in addition to the interest you’ve earned throughout the CD’s term. Or you can roll it over into a new CD.

What Is a Savings Account?

A savings account, which you can open at a bank, credit union, or other financial institution, is a place where you can save money without locking it away for an extended period of time. A savings account is a good fit for money you want to protect and grow while still being able to access it — say, for an emergency fund or a down payment for a car you plan to buy in the next few months.

Similar to investing in a CD, savings accounts generate interest but generally at a lower rate. It’s possible to find a high-yield savings account at some financial institutions (most often online banks) that come with a higher interest rate than traditional savings accounts.

Again, it’s wise to choose a savings account with FDIC insurance to protect the funds in the savings account. If the savings account is held at a credit union instead of a bank, then the National Credit Union Administration or NCUA vs FDIC insures the money under similar guidelines.

How Does a Savings Account Work?

Savings accounts allow for more withdrawals than a CD (which allows none until the CD matures), but you can typically only do six withdrawals from a savings account per month. There has, however, been some flexibility with this guideline (known as the Federal Reserve’s Regulation D); check your particular financial institution for specifics.

Someone might put money in savings to:

•  Save money for a financial goal or emergencies

•  Keep their money safe

•  To separate the money they want to save from the money they want to spend

•  To earn interest and grow their savings.

💡 Quick Tip: Don’t think too hard about your money. Automate your budgeting, saving, and spending with SoFi’s seamless and secure mobile banking app.

3 Similarities Between a CD and Savings Account

If you’ve ever thought of a CD and a savings account being the same thing, there’s a good reason why: There are a few similarities between them.

1. Insured

Typically, it’s not hard to find a CD or savings account that is insured by either the FDIC or the National Credit Union Administration (NCUA) which helps protect the money in those savings vehicles.

2. Earns Interest

Both CDs and savings accounts earn interest on the money deposited into them.

3. Good Ways to Save Money

You know that saying: Out of sight, out of mind. By putting money into a CD or savings account, you may find it easier to save money and resist the temptation to spend it. Once it’s deposited, you know you can’t touch it without paying a penalty.

Differences Between a CD and Savings Account

Of course, there are some key differences between these accounts worth understanding. Knowing these points could help you decide between a high-yield savings account vs. a CD.

Accessibility

With a CD, you can’t remove your money until the date of maturity without being fined. With a savings account, you can usually make up to six withdrawals a month or even unlimited withdrawals.

Amount of Interest Earned

While savings accounts do generally earn interest on the money stored in them, and high-yield accounts (typically offered by online banks), CDs may earn more interest. Comparison-shop to see what’s offered.

Certificate of Deposit vs Savings Account

Here, in chart form, is a summary of how CDs and savings accounts are alike and how they differ.

Similarities	Differences
Insured	Accessibility
Earns interest	Amount of interest earned
Good way to save money

When to Use a CD Instead of a Savings Account

It can be hard to decide between a CD vs. a savings account. A CD is a good fit if you have money you don’t need to access anytime soon and if you can earn a higher interest rate by agreeing not to tap those funds for a while.

For instance, let’s say you got a bonus at work (lucky you!) and aren’t quite sure what you want to do with it, but you do know you don’t want to fritter it away. Putting it in a CD will keep it safe and earning interest while you decide how you might want to use it in the future.

When to Use a Savings Account instead of a CD

Generally, a savings account can be a better option if you need your money to be easily accessible in the near future. That’s why a savings account is a good place to store an emergency fund or when saving up for a short-term financial goal.

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

How to Open a CD

Both banks and credit unions offer CDs. To open a CD, you can choose a financial institution to open your CD at, pick the type and term of CD you want, and then decide how often you want to collect your interest payments (monthly or annually).

The process typically involves sharing your ID (more on that in a moment), proof of address, and other credentials.

The final step will be to fund the CD: That happens by transferring the money online, via a phone transfer, or by mailing a check.

How to Open a Savings Account

The first step in opening a savings account is to select a financial institution. Unless you already have some sort of account at the institution, you will likely have to provide the following information in order to complete the process:

•  Name

•  Date of birth

•  Address

•  Identification number (Social Security number, Individual Taxpayer Identification Number, passport number and country of issuance, alien identification card number, etc.)

•  Proof of a U.S. or state government issued identification card with your photo (driver’s license, U.S. passport, military identification, etc.)

•  A bill with your name and address on it

•  Birth certificate.

Recommended: Different Types of High-Interest Accounts to Know

Opening a Savings Account with SoFi

If a savings account seems like a good option to you, SoFi might be the right bank.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Is a certificate of deposit the same as a savings account?

No, a certificate of deposit (CD) is not the same thing as a savings account. Money placed in a CD is not easily accessible like a savings account; you agree not to touch it for a period of time, usually from six months to a few years.

Is a certificate of deposit better than a savings account?

That depends on your unique financial needs. If you have money you don’t need to access anytime soon and can find a higher interest rate vs. a savings account, then a CD is likely a better fit. If, however, you need to be able to access your money and make withdrawals, a savings account will probably better suit you.

Does a certificate of deposit give you better interest than a savings account?

In general, a CD can provide a better interest rate than a savings account, but it pays to research exactly what is being offered. That being said, it’s worth comparing the difference in those interest rates before making a decision. It’s possible that a CD’s interest rate might not be high enough to outweigh the downside of not being able to access your funds the way you can with a savings account.

Is a certificate of deposit safer than a savings account?

Both CDs and savings accounts are insured by either the FDIC or NCUA, depending on which kind of financial institution you make your deposit.

How long should you keep money in a CD?

CDs are offered with different terms, from a few months to a number of years. Typically, you will earn a higher interest rate with a longer CD. However, it’s important to consider how long you can comfortably tie up your money. If you withdraw funds before the CD’s term of deposit is up, you may face penalties.

---

Photo credit: iStock/Moyo Studio

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

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

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

SOBK0523016

Read more

The Secured Overnight Financing Rate (SOFR) is the benchmark interest rate that has replaced the London Interbank Offered Rate (LIBOR) in the U.S. In fact, for the past several years, lenders have been gradually switching from using LIBOR to determine rates for consumer loans, such as student loans, to using SOFR.

Here’s what you need to know about SOFR, including how it differs from LIBOR, and how you might be impacted by the change.

What Is the Secured Overnight Financing Rate (SOFR)?

Financial institutions now use Secured Overnight Financing Rate, or SOFR, as a tool for pricing corporate and consumer loans, including business loans, student loans, mortgages, and credit cards. SOFR sets rates based on the rates that financial institutions pay one another for overnight loans (hence the name). The SOFR rate is published daily by the Federal Reserve Bank of New York.

SOFR is a popular benchmark because it is risk-free and transparent. It is based on more than $1 trillion in cleared marketplace transactions. This in contrast to the index it has replaced, the London Interbank Offered Rate, better known as LIBOR. LIBOR was based on hypothetical short-term loan rates. This has historically made LIBOR less reliable and more vulnerable to insider manipulation.


💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.

How Does the SOFR Work?

When large financial institutions lend money to one another, they must adhere to reserve and liquidity requirements. They do this by using Treasury bond repurchase agreements, known as “repos”. Using repo agreements, Treasurys are used as collateral and banks are able to make overnight loans.

The SOFR interest rate index is made up of the weighted averages of the interest rates used in real, finalized repo transactions. Every morning, the New York Federal Reserve Bank publishes the SOFR rate it has calculated for repo transactions on the previous business day.

Current SOFR Rates

The New York Federal Reserve publishes the SOFR rate every business day. The latest rate is:

5.06% on July 25, 2023

The History of SOFR

Financial institutions, banks, and lenders rely on certain indexes to determine interest rates. Before the 1980s, there wasn’t one particular index that was used internationally. However, during the 1980s, increased complexity in the market resulted in the need for more standardized use of a benchmark tool for determining adjustable rates.

The international financial industry adopted LIBOR as the standard because it was viewed as a trusted, accurate, and reliable index. Other indexes were still used, but the majority of institutions used LIBOR. LIBOR rates were once the basis for about $300 trillion in assets around the world.

Fast forward to around 2008, and certain large financial institutions were manipulating interest rates illegally in order to increase their profits. This was possible in part because LIBOR is based on hypothetical rates. Manipulation of rates was one factor that led to the financial crisis.

Once that manipulation was discovered, there was a global demand for a new rate benchmark and a call to end the use of LIBOR. As a result of the 2008 financial crisis, banking regulations led to less borrowing and a lessening of trading activity. Less trading made LIBOR even less reliable.

In 2017, the Federal Reserve formed a group of large financial institutions known as the Alternative Reference Rate Committee (ARRC) to work on finding an alternative to LIBOR. They ultimately chose SOFR.

Both LIBOR and SOFR were being used by banks and lenders until June 2023, when SOFR became the standard in the U.S.

How SOFR Is Different From LIBOR

There are some key differences between SOFR and LIBOR, which help explain the shift towards SOFR and away from LIBOR. Here’s a look at some of the biggest.

•   SOFR is based on completed transactions, whereas LIBOR is based on the rates that financial institutions said they would offer each other for short-term loans. Because it’s based on hypotheticals, LIBOR is more vulnerable to manipulation.

•   Lending based on LIBOR doesn’t use collateral, making it unsecured. Loans using LIBOR include a premium due to credit risk. SOFR, on the other hand, is secured, as it is based on transactions backed with Treasurys. Therefore, there is no premium included in the interest rates.

•   SOFR is a daily (overnight) rate, while LIBOR has seven variable rates.

Recommended: What’s the Average Student Loan Interest Rate?

How SOFR Could Affect You

There has been some concern that the shift away from LIBOR would cause great market disruption. However, the changeover was designed to be slow and gradual and, generally, hasn’t caused any sudden changes for borrowers.

In fact, if you have a federal student loan or a private student loan with a fixed-rate, the change from LIBOR to SOFR has not — and will not — have any impact on your loan, since the rate is fixed for the life of the loan. If you are entering into a new loan, SOFR rates are already being used.

If you have a student loan (or any other type of loan) with a variable rate, the shift from LIBOR to SOFR may have impacted your loan — but likely not in any noticeable way. Switching from one index (LIBOR) to another, largely similar index (SOFR) — in the absence of any other market changes — won’t have much impact on a loan’s interest rate, according to the Consumer Financial Protection Bureau .

The rate on an adjustable-rate loan can go up and down over time. These changes, however, are largely due to general ups and downs in interest rates across the economy. Loan rates have been going up across the board, but that is not due to the shift from LIBOR to SOFR. Rather, it’s the result of efforts by the Federal Reserve to tamp down inflation.


💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.

The Takeaway

If you have a student loan, you may have received a notice from your lender or servicer about a change in the index rate for your loan. Instead of LIBOR, lenders in the U.S. are now using SOFR. The indexes work in a similar way and it should not have a major impact on your loan. If you’re in the market for a new loan, you won’t be affected by the switch, since U.S. lenders have already made the shift to SOFR.

Keep in mind, though, that interest rates on loans are based on numerous factors, including general market conditions and your (or your cosigner’s) qualifications as a borrower.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

---

Photo credit: iStock/Nicholas Ahonen

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIS0223004

Read more

Junk bonds are a type of corporate bond that carry a higher degree of risk and generally have lower credit ratings. The bond issuers are more likely to default, making junk bonds speculative investments.

So why would investors buy a junk bond? For one simple reason: They have the potential to produce bigger returns compared to other bond options.

Junk bonds aren’t necessarily right for every investor, because they are so risky. Understanding how junk bonds work can help you decide if they belong in your investment portfolio.

How Do Junk Bonds Work?

Bonds are a form of debt. When a corporation or government entity issues a bond, they’re doing so for the purposes of raising capital. Investors buy the bonds, providing the capital, and in return, they expect to get paid that money back along with interest.

There’s an implied agreement between the investor and the bond issuer that the latter will make interest payments on time, but in addition, bonds can be secured or unsecured. Treasury bonds, for example, are unsecured bonds that are backed by the full faith and credit of the U.S. government.

Junk bonds, also referred to as high-yield bonds, represent a category of bonds that fall below investment-grade. In simple terms, this means there’s a greater risk that the bond issuer could default or fail to follow through on their promise to repay investors. Whether a bond is considered to be investment-grade or not depends on its credit ratings.

Credit Ratings and Junk Bonds

Bond credit ratings are issued by a number of organizations. These agencies determine which bonds are considered to be investment-grade and which are non-investment grade or speculative-grade.

In the United States, the majority of bond credit ratings are issued by three agencies, on an ABCD scale:

•   Moody’s Investors Services

•   Standard & Poor’s Global Ratings

•   Fitch Ratings

Bonds with a rating of BBB or higher (Baa on the Moody’s scale) are categorized as investment-grade. This means that in the eyes of the rating agency, default risk is low or in other words, investors are reasonably likely to get their money back from the bond issuer.

When bonds fall below the BBB rating range (Ba for Moody’s), they’re considered to be junk bonds. The further the rating drops, the riskier and more speculative the bond becomes. Here’s how junk bond credit ratings compare.

	Moody’s	S&P Ratings	Fitch Ratings
High Risk	Ba or B	BB or B	BB or B
Highest Risk	Caa, Ca or C	CCC, CC or C	CCC
In Default	C	D	DDD, DD or D

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Why Do Investors Like Junk Bonds?

The riskier an investment is, the more potential it has to deliver higher returns. That lies at the heart of why some investors might prefer junk bonds over investment-grade bonds. Junk bonds can have varying maturities like other types of bonds. Typically, these are longer term bonds, with maturities lasting in the five- to 10-year range.

Investing in junk bonds could yield returns on the same level as stocks but with less volatility. That’s because you’re getting the promise of a fixed interest payment, rather than depending on which way the market swings on any given day to determine returns. If the bond issuer undergoes a financial turnaround and its credit rating improves, that can reduce the level of risk associated with its bonds.

Junk bonds can be attractive to investors in low interest rate environments as well. That’s because unlike other bonds, they’re less sensitive to interest-rate movements. Bond issuers may be highly motivated to raise capital so they can offer higher rates to attract investors. Investor risk may also be reduced when the economy is growing, since that can be conducive to improvements in the financial health of bond issuers.

Recommended: How Do Corporate Bonds Work?

Examples of Junk Bonds

Companies that issue junk bonds tend to be newer companies or established ones that may be struggling financially following bankruptcy. For instance, one company that has junk bond ratings in 2023 is Coinbase (NASDAQ:COIN), a cryptocurrency exchange. Because of the speculative and high-risk nature of crypto trading, the company has a junk bond rating. In early 2023, Coinbase’s junk bonds were downgraded even further by Moody’s and Standard & Poor’s Global Ratings.

Advantages and Disadvantages of Junk Bonds

Investing in junk bonds has both pros and cons, just like other investments.

On the advantages side, investors have potential to earn higher yields from junk bonds than other types of bonds. There’s less volatility to contend with compared to stocks, and fixed interest payments could provide a steady source of income. Depending on the credit rating of the bond issuer, it’s possible that a junk bond could actually be less risky compared to a stock.

On the other hand, junk bond investing is speculative, so an investor has to be willing to accept the possibility of losses — specifically, default risk and the likelihood of the bond issuer missing an interest payment. In the worst-case scenario, the company could go bankrupt, meaning an investor may not get their initial investment back, much less the interest. One also has to consider the time component, since junk bonds are not designed to be held for the shorter term.

Junk Bond Advantages	Junk Bond Disadvantages
Investors could earn interest rates above what investment-grade bonds are paying.	Default risk is typically higher with junk bonds vs. investment-grade bonds.
Compared to stocks, junk bonds are less susceptible to volatility and may be less risky overall.	If the bond issuer goes bankrupt, the investment could end up being a total loss.
Fixed interest payments may provide a consistent stream of income for investors.	They’re not suited to short-term investing given the duration of junk bonds and pricing fluctuations.

How to Invest in Junk Bonds

If you’re considering investing in junk bonds, opening a brokerage account is a good place to start. If you already have an investment account, you can move on to purchasing junk bonds. There are a few different ways you can do this:

•   Purchase individual junk bonds, if your brokerage offers them.

•   Buy a junk bond mutual fund.

•   Invest in a junk bond exchange-traded fund (ETF).

Buying individual junk bonds can be risky, as it concentrates investment dollars in a single security. Higher minimum investments may limit the number of junk bonds an investor is able to purchase.

Investing in junk bond funds or ETFs instead may make it easier to spread out your investment dollars while spreading out risk. Junk bond funds and ETFs can offer exposure to a basket of junk securities which can help with diversification and risk management.

When comparing junk bond funds or ETFs, consider the underlying credit ratings for each security that’s represented. This can tell you whether the fund mostly holds high risk, higher risk or in default bond offerings. Also consider the expense ratios involved and the maturity terms so you’re choosing a fund that fits both your budget and timeline for investing.


💡 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.

Are Junk Bonds a Good Investment?

Should you buy junk bonds? The answer depends largely on your personal risk tolerance. Junk bonds may be a good investment for investors who are comfortable taking more risk for a shot at higher returns. On the other hand, you may choose to steer clear of them if you’re looking for fixed-income investments that are on the safer side.

What’s important to consider before investing is the entire makeup of your portfolio as a whole and your financial goals. If you’re interested in junk bonds, think about how much of your portfolio you’re comfortable dedicating to them and how that could affect your overall risk profile.

The Takeaway

Investing in bonds can add a fixed-income element to an investor’s portfolio, which may be helpful for diversification. Alongside stocks, bonds may help you devise a more well-rounded investment strategy as you work toward your financial goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

---

Photo credit: iStock/fizkes

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

SOIN0723084

Read more