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When a check bounces, no money is transferred. The person who was expecting to be paid doesn’t receive their funds, which can have significant ramifications.

This situation can start innocently enough. Sure, accidents happen, and all of us make mistakes. If someone writes a check and doesn’t realize they don’t have enough funds in their checking account for the check to clear, they may end up bouncing one or more checks. Fees may start to pile up too. Whether it’s a rookie mistake or fraudulent activity, bounced checks require action to resolve the situation and avoid more charges.

Why Do Checks Bounce?

When a check bounces, that means it can’t be processed or paid. Checks can bounce for a few reasons. Banks or credit unions may not be able to process a check if any of the following issues occur.

•   The account associated with the check didn’t have sufficient funds in it to fulfill the deposit needs.

•   An error occurred when the check was written (mismatched amount box and amount line, a misspelling in the recipient’s name, etc.).

•   The checking account of the check writer had been closed.

•   A stop payment order was issued on the check.

•   The check is too old (most checks aren’t honored after six months).

•   The check is fraudulent.

What Fees Come With Bounced Checks?

If someone writes a check that bounces (also known as a bad check), their bank may charge them fees. Typically, this will be an overdraft fee or a nonsufficient funds fee if the cause of the bounce was not having enough money in their checking account. These fees are often about $35 per instance, and the merchant who received the check that bounced can charge another $20 to $40 fee.

On the flip side, if someone receives a check that bounced, their bank may charge them a returned check fee. This also may cost about $30 or $35 (or more) per instance.

What Should I Do If My Check Bounces?

What happens if you bounce a check? There are a few different scenarios to consider here:

•   If you have overdraft protection, your bank may transfer the funds to cover the transaction. Your check doesn’t exactly bounce in this case, but you will be paying fees for the privilege of not having the check returned. If you have linked your checking account to another backup account, the check should also be paid, even if you don’t have enough money in your bank account to pay it.

•   If your bank doesn’t cover the check, here’s what happens when your check bounces: It will head back to you, unpaid. You will typically be charged a nonsufficient funds fee or returned check fee. Was your check heading to a merchant or business? They might hit you with a fee as well, to compensate them for the inconvenience. You’ll likely want to rectify the situation as soon as possible. If your account is overdue, the company you were paying may be able to charge late fees or send the account to collections.

What Should I Do if I Receive a Bounced Check?

On the flip side, what happens if a check you deposit or a check you signed over to another person bounces? Your next step after you realize the check is not going to be paid is to contact the check writer. Either request a new check or a different type of payment. Ideally, this issue will be resolved after the first conversation, but if not, the recipient can take the following steps to get a paper trail of the current status of their payment.

•   Write a demand letter and send it via certified mail.

•   Include the check amount, the date it was written, and any fees paid because of the bounced check. Request the amount that is owed.

•   Save a copy of this letter as it can be helpful to have on hand if legal action is pursued.

Do Bounced Checks Affect My Credit Score?

No, bounced checks typically don’t affect credit scores. They are not reported to the three major consumer credit bureaus (Equifax, Experian, and TransUnion). However, if someone misses a payment because a check they wrote bounced and they failed to follow up and make their account current (such as with a credit card payment) that could lead to their credit score being damaged and the debt they owe being sent to collections. Also, bounced checks may negatively impact your checking report (say, the one compiled by ChexSystems), which could make it harder for you to open a bank account in the future. You might need to, say, open a second chance bank account vs. standard bank account.

Legal Consequences to Bounced Checks

While many bounced check issues can be resolved quickly, in some cases, the situation can escalate and lead to legal consequences. These are two different types of legal issues that can arise after someone writes a bad check. Here’s a closer look.

Civil Charges

In most states, writing bad checks is a misdemeanor. If a person is found guilty, they may have to pay the amount of the check’s value, or a multiple of that, or the check’s amount as well as legal and court fees.

Criminal Charges

An average bounced check caused by not having enough funds in a checking account likely won’t lead to criminal charges. However, in some states, writing a bad check (especially one that exceeds a specified dollar amount) can be considered a felony, lead to jail time, and result in paying thousands of dollars in fees. While an occasional accidental bounced check may be able to be cleared up, repeat offenses are the ones that risk criminal charges.

Preventing a Check From Bouncing

The best way to prevent a check from bouncing? Make sure the checking account linked to the check has enough cash in it to cover the check from the available funds. It’s also important to double-check that the account will have enough money in it in a few days or weeks (depending on how long it takes the recipient to cash the check) to make sure an accidental overdraft doesn’t happen. This is a common scenario: Someone will write a check and forget about it, mistakenly assuming it’s been cashed. In reality, the recipient holds onto the check or maybe the check was lost in the mail for a while. Then, the recipient deposits the outstanding check weeks later, when there isn’t enough money to cover it.

Another way to cover yourself is to sign up for overdraft protection or link your checking account to a backup account, which can fund a check that is at risk of bouncing.

Using a P2P payment method like Venmo or ApplePay instead of a check can help avoid the potential of a bounced check altogether. With P2P models, money can’t be transferred to the recipient unless it is already in the payer’s account. As an added bonus, you don’t have to carry around a checkbook.

Consumers also have the option to use a certified check or cashier’s check to make the payment process more secure.

The Takeaway

Checks can bounce for many reasons, but typically this occurs when a person writes a check without making sure they have enough funds to cover the amount. Perhaps they forgot to move enough money from their savings account into their checking account or overlooked the fact that some automatic deductions were coming up. For these reasons, keeping a close eye on your checking account balance is an important step to your financial health. Writing or receiving a bounced check can result in fees for both parties involved and can create a lot of unnecessary stress.

Want a better way of banking? Take a look at what SoFi offers. When you sign up for an online bank account with direct deposit, you won’t pay overdraft charges, nor monthly or minimum-balance fees. And you’ll earn an amazing APY.

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

Who gets charged for a bounced check?

Unfortunately, both the check writer and the recipient often have to pay a fee if a check bounces. The person who wrote the check may have to pay an overdraft fee or a nonsufficient funds fee. The recipient of the bounced check may be charged a returned check fee as well.

Can you get in trouble for depositing a check that bounces?

It is possible to get in trouble for depositing a check that bounces. Your bank may charge you a returned check fee even though it wasn’t your fault that the check bounced. There are steps you can take to verify a check before depositing it.

How long does it take for a bad check to bounce?

It can take a few days for a check to clear or, in the case of a bad check, not to clear. It’s best to wait up to five days after depositing a check to make sure it doesn’t bounce.

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

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

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

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

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

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

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

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

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.

Photo credit: iStock/nortonrsx
SOBK0522019

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If you ever see a bank error made in your favor, you might think, “Free money!” but the truth is, you need to report the error ASAP.

An unfortunate fact of life is that people — and sometimes technology — can make mistakes. Every once in a while, your bank might make an error and deposit cash into your account that wasn’t meant for you. A teller at a bank branch could have entered the wrong digit in an account number as a customer tried to deposit a check or transfer funds, for example. Whatever the reason, you’ll notice that your bank account balance is higher than it ought to be.

While this may seem like a cash windfall and you might be tempted to keep the money, you should report the error to your bank as soon as you notice it. That way, the mistake can be corrected as quickly as possible.

Can I Keep the Money from a Bank Error in My Favor?

So what happens when money is accidentally deposited into your account? You may wonder if it’s a case of “finders, keepers.” Well, the only time that you can keep funds added to your account is when the money deposited was legitimately meant for you.

When a bank error occurs in your favor, you cannot keep the money — even if the error seems small and likely to fly under the radar. The money isn’t legally yours, so you must return it.

What’s more, the customer whose money accidentally landed in your account will probably notice the mistake and ask the bank to track down the money. Or, the bank will catch the mistake in one of the regular audits that it makes on accounts and withdraw the money again. If the money isn’t in your account, they may ask you why you didn’t report the mistake earlier.

Recommended: Ways to Deposit Money into a Bank Account

What Is the Penalty for Attempting to Spend or Keep the Money?

Now, let’s consider what would happen if you didn’t report and return the money mistakenly put in your account. Even if you are a person who doesn’t pay much attention to your banking details and assume the money is yours, it is still a big problem if you use it. If you spend the money from a bank error in your favor, move it to another account, invest it, or give it away, you could wind up in a lot of hot water.

Failing to return the money may be tantamount to theft, and you could face criminal charges, such as theft of property lost by mistake or receiving stolen property. Criminal charges may be made to get a court order to force you to repay the amount, and in some cases, you could end up with probation or prison time. That’s a very good reason to get the funds back to your bank as soon as you realize there’s been an error.

A few years ago, a Pennsylvania couple went on a spending spree when their bank accidentally deposited $120,000 in their account instead of a business’ account due to a teller error. The couple bought various vehicles with the money and also gave $15,000 away to friends in need.

The bank requested that the couple return the money and then reversed the transfer, causing an overdraft on the couple’s account of over $100,000. The couple was eventually convicted of theft, sentenced to seven years’ probation, 100 hours of community service, and ordered to repay the money they stole. Surely, this is a good example of why there’s no such thing as free money in this situation.

When Should I Report the Error?

If you discover money in your account and can’t explain where it came from, contact your bank right away, and ask them to figure out the origins of the funds. If it turns out the money really was for you — perhaps a relative deposited it in your account as a gift, for example — your bank will let you know that you are free to access the funds and use them for whatever you’d like.

If the funds weren’t originally meant for you, the bank can start the process of reversing the transaction.

To report the error, first call your bank. Take down the name of the person you talked to and make a note of the time and date. Follow up your call with an email that outlines the details of the error. That way, you’ll have a paper trail of your attempts to correct the issue. The time frame in which to report a bank error varies, so check with your particular account’s fine print to know the specifics.

What Happens if the Bank Does Not Respond?

Generally speaking, banks have 10 days to complete an investigation into an account error. But it is possible the investigation could take as long as 45 days. You can take a look at your deposit account agreement to find out how long it should take your bank.

If nothing has changed after that period of time, contact your bank again to check in on the progress of the investigation. Do not assume the money has somehow become rightfully yours. You don’t want to make a bad situation worse, cause legal action, and wind up eventually having to hire a lawyer to represent you.

What Should I Do So That I Don’t Get in Trouble?

When an erroneous deposit is made to your account, here are the steps you should take to help ensure that you don’t get into any trouble.

Do Not Touch or Transfer Money

First things first, if you notice money in your account that’s not yours, don’t touch it. Don’t spend, don’t give it to someone else, and don’t move it into a different account. Don’t even spend the money if you plan to repay it and report the mistake later. Anything you do to tamper with the money, no matter how benign it seems, could have big consequences later.

Contact Your Bank

As we mentioned above, contact your bank immediately when you notice the error, and keep records of your interactions.

Monitor Your Account

Get in the habit of scoping out your financial accounts regularly, whether it’s checking your credit report, bank account, or even checking medical bills for errors. The fact that even your bank can accidentally deposit money into your account illustrates the necessity of reviewing your bank account regularly.

If you don’t look at your account statement frequently, you may not notice small errors, and these can have a big impact on your personal finances. How often should you check your bank account? There’s no precise answer, but between once a week and once a month can be a good place to start.

For example, say a small deposit of just a few hundred dollars is accidentally made to your checking account. Say, too, that you don’t notice the deposit and spend some of the funds. When the bank discovers the mistake, they can withdraw the funds without your permission, freeze your account, or put a hold on your funds. If you’re still operating unaware of the erroneous deposit, this can wreak havoc on your account. It could cause overdrafts or your checks to bounce. It might gum up the works on any automated bill pay that you may have set up.

As a result, you may be on the hook for overdraft fees, or you may end up paying some bills late.

Keeping careful tabs on your account can help you catch errors so you can avoid these situations and improve your financial health. Consider setting up alerts for deposits in your account. That way you can spot any mistakes as soon as they happen. You may want to consider other automatic ways to monitor your finances, such as credit score monitoring and card security and protection, to help keep your accounts safe.

The Takeaway

Now you know what to do if money is accidentally deposited into your bank account. If a financial institution makes a mistake in your favor, sorry to say, this isn’t the moment to go on a spending spree. The best thing you can do is act quickly to alert your bank. That way, the error can be corrected, the right person can receive the money they need, and you can continue banking as usual. If you fail to do so, you could wind up with overdrafts and other issues when the bank takes the money back. Worse still, you could face legal consequences with far-reaching effects. So do the right thing, and keep your financial life on the up and up.

Here’s a no-funny-business way to help your money grow: Bank with SoFi. We’re committed to zero account fees as well as superior interest rates. Sign up for our Checking and Savings with direct deposit, and you’ll earn a super competitive 4.60% APY which is 41 times the current national checking account average. Plus, we won’t deduct any monthly, minimum balance, or overdraft fees.

Bank smarter with SoFi.

FAQ

Can I keep money credited in error to me?

No, you cannot keep money that is deposited in your account in error. You should alert your bank and have the funds redirected to their rightful owner.

Do I have to report a bank error?

Yes, you should report the error. Contact your bank and report the mistaken deposit as soon as you notice it so the problem can be corrected.

What happens if the bank makes a mistake? Who is responsible and why?

If your bank makes a mistake, you should alert them as soon as you notice it. Your bank will also run regular audits of your accounts, which can help them catch errors. When they do catch a mistake, it must be resolved with the funds going back to the correct account. To do so, the bank can reverse transfers, withdraw funds from your account, freeze your account, or place a hold on the funds without your permission. If the money isn’t there, you will be asked to repay it, and you may face criminal charges.

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Photo credit: iStock/fizkes

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOBK0422012

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When it comes to investing in stocks, there’s no single way to analyze stocks to find a sure winner. That being said, there are many methods that ordinary investors can use to find stocks that are trading at a discount to their underlying value.

The first step in how to analyze a stock before buying is reviewing financial statements. From there, investors can use various methods of analysis to assess investment opportunities and potentially identify worthwhile investments.

Why Analyzing Stocks Is Important

The process of stock analysis can reveal important information about a company and its history, allowing investors to make more informed decisions about buying or selling stocks. Analyzing stocks can help investors identify which investment opportunities they believe will deliver strong returns. Further, stock analysis can assist investors in spotting potentially bad investments.

Whether you’re strategy involves short vs. long term investing, or day trading, analyzing stocks is going to be important.

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

Understanding Financial Statements

The first step in understanding stock analysis is knowing the basics of business reporting. There are three main types of financial statements that an investor may need to look at when doing analysis:

•   Income statement: This statement shows a company’s profits, which are calculated by subtracting expenses from revenue.

•   Balance sheet: The balance sheet compares a company’s assets, liabilities, and stockholder equity.

•   Statement of cash flows: This statement outlines how a company is spending and earning its money.

In addition to these statements, a company’s earnings report contains information that can be useful for doing qualitative analysis. The annual report includes the company’s plans for the future and stock value predictions.

4 Ways to Analyze a Stock

The next step in stock evaluation is deciding which type of analysis to do. Here’s a look at some of the different methods for how to analyze a stock.

1. Technical Analysis

Technical analysis is a method for analyzing stocks that looks directly at a stock’s supply and demand in order to make investing decisions. This form of analysis takes the stance that all information needed is present within stock charts and the analysis of history and trends.

Some key focal points of technical analysis are:

•   Stock prices move in trends.

•   History repeats itself.

•   Stock price history can be used to make price predictions.

•   Stock price contains all relevant information for making investing decisions.

•   Technical analysis does not consider intrinsic value.

Trend indicators are one of the most important parts of technical analysis. These indicators attempt to show traders whether a stock will go up or down in value. Uptrends mean higher highs and higher lowers, whereas downtrends mean lower lows and lower highs. Some common trend tools include linear regression, parabolic SAR, MACD, and moving averages.

Technical analysis also uses leading indicators and lagging indicators. Leading indicators signal before new trends occur, while lagging indicators signal after a trend has ended. These indicators look at information such as volume, price, price movement, open, and close.

There can be some pros and cons to using technical analysis, however, which can be important to consider when factoring in your risk tolerance.

Day traders tend to focus on technical analysis to try to capitalize on short-term price fluctuations. But because technical analysis generally focuses on short-term fluctuations in price, it’s not as often used for finding long-term investment opportunities.

Further, while technical analysis relies on objective and consistent data, it can produce false signals, particularly during trading conditions that aren’t ideal. This method of analysis also fails to take into consideration key fundamentals about individual shares or the stock market.

2. Qualitative Stock Analysis

When considering how to analyze a stock, it’s also a good idea to look at whether the company behind the stock is really a good business. Qualitative analysis looks into factors like a company’s leadership team, product, and the overall industry it’s a part of.

A few key qualitative metrics to look at are:

•   Competitive advantage: Does the company have a unique edge that will help it be successful in the long term? If a company has patents, a unique manufacturing method, or broad distribution, these can be positive competitive advantages.

•   Business model: Analyzing a business model includes looking at products, services, brand identity, and customers to get a sense of what the company is offering.

•   Strong leadership: Even a great idea and product can fail with poor management. Looking into the credentials of the CEO and top executives of a company can help in evaluating whether it’s a good investment.

•   Industry trends: If an industry is struggling, or looks like it may in the future, an investor may decide not to invest in companies in that industry. On the other hand, new and growing industries may be better investments. This is not always the case, as there are strong companies in weak industries, and vice versa.

3. Quantitative Analysis

Similar to technical analysis, quantitative analysis looks at data and numbers in an attempt to predict future price movements. Specifically, quantitative analysis evaluates data, such as a company’s revenues, price-to-earnings ratio, and earnings-per-share ratio, and uses statistical modeling and mathematical techniques to predict a stock’s value.

The upside is that this financial data is publicly available, and it creates an objective, consistent starting point. It can help with identifying patterns, and it can be useful in assessing risk. However, it requires sifting through a lot of data. Further, there’s no certainty when it comes to patterns, which can change.

4. Fundamental Analysis

Fundamental analysis looks at a company from a basic financial standpoint. This gives investors a sense of the company’s financial health and whether its stock may be under- or overvalued. Fundamental analysis takes the stance that a company’s stock price doesn’t necessarily equate to its value.

There are a number of key tools for fundamental analysis that investors might want to familiarize themselves with and use to get a fuller picture of a stock.

Earnings Per Share (EPS)

One of the main goals for many investors is to buy into profitable companies. Earnings per share, or EPS, tells investors how much profit a company earns per each share of stock, and how much investors are benefiting from those earnings. Companies report EPS quarterly, and the figure is calculated by dividing a company’s net income, minus dividend payouts, by the number of outstanding shares.

Understanding earnings per share can give investors guidance on a stock’s potential movement. On a basic level, a high EPS is a good sign, but it’s especially important that a company shows a high or growing EPS over time. The reason for this is that a company might have a temporarily high EPS if they cut some expenses or sell off assets, but that wouldn’t be a good indicator of the actual profitability of their business.

Likewise, a negative EPS over time is an indicator that an investor may not want to buy a stock.

Revenue

While EPS relates directly to a company’s stock, revenue can show investors how well a company is doing outside the markets. Positive and increasing revenues are an indicator that a company is growing and expanding.

Some large companies, especially tech companies, have increasing revenues over time with a negative EPS because they continue to feed profits back into the growing business. These companies can see significant stock value increases despite their lack of profit.

One can also look at revenue growth, which tracks changes in revenue over time.

Price-to-earnings (P/E) Ratio

One of the most common methods of analyzing stocks is to look at the P/E ratio, which compares a company’s current stock price to its earnings per share. P/E is found by dividing the price of one share of a stock by its EPS. Generally, a lower P/E ratio is a good sign.

Using this ratio is a good way to compare different stocks. One can also compare an individual company’s P/E ratio with an index like the S&P 500 Index to get a sense of how the company is doing relative to the overall market.

The downside of P/E is that it doesn’t include growth.

Price-Earnings-Growth (PEG) Ratio

Since P/E doesn’t include growth, the PEG ratio is another popular tool for analyzing stocks and evaluating stock performance. To look at EPS and revenue together, investors can use the price-earnings-growth ratio, or PEG.

PEG is calculated by dividing a stock’s P/E by its projected 12-month forward revenue growth rate. In general, a PEG lower than 1 is a good sign, and a PEG higher than 2 indicates that a stock may be overpriced.

PEG can also be used to make predictions about the future. By looking at PEG for different time periods in the past, investors can make a more informed guess about what the stock may do next.

Price-to-Sales Ratio (P/S)

The P/S ratio compares a company’s stock price to its revenues. It’s found by dividing stock price by revenues. This can be useful when comparing competitors — if the P/S is low, it might be more advantageous to buy.

Debt-Equity Ratio

Although profits and revenue are important to look at, so is a company’s debt and its ability to pay it back. If a company goes into more and more debt in order to continue growing, and they’re unable to pay it back, it’s not a good sign.

Debt-equity ratio is found by dividing a company’s total liabilities (debt) by its shareholder equity. In general, a debt-equity ratio under 0.1 is a good sign, while a debt-equity ratio higher than 0.5 can be a red flag for the future.

Debt-to-EBITDA

Similar to debt-to-equity, debt-to-EBITDA measures the ability a company has to pay off its debts. EBITDA stands for earnings before interest, tax, depreciation, and amortization.

A high debt-to-EBITDA ratio indicates that a company has a high amount of debt that it may not be able to pay off.

Dividend Yield

While a stock’s price can vary significantly from day to day, dividend payments are a way that investors can earn a consistent amount of money each quarter or year. Not every company pays out dividends, but large, established companies sometimes pay out some of their earnings to shareholders rather than reinvesting the money into their business.

Dividend yield is calculated by dividing a company’s annual dividend payment by its share price. The average dividend yield for S&P 500 companies is around 2%.

One thing to note is that dividends are not guaranteed — companies can change their dividend amounts at any time. So if a company has a particularly high dividend yield, it may not stay that way.

Price-to-Book Ratio (P/B)

Price-to-book ratio, or P/B, compares a company’s stock market value to its book value. This is a useful tool for finding companies that are currently undervalued, meaning those that have a significant amount of growth but still relatively low stock prices.

P/B ratio is found by dividing the market price of a stock by the company’s book value of equity. The book value of equity is found by subtracting the company’s total liabilities from its assets.

Company Reports and Projections

When companies release quarterly and annual earnings reports, many of them include projections for upcoming revenue and EPS. These reports are a useful tool for investors to get a sense of a stock’s future. They can also affect stock price as other shareholders and investors will react to the news in the report.

Professional Analysis

Wall Street analysts regularly release reports about the overall stock market as well as individual companies and stocks. These reports include information such as 12-month targets, stock ratings, company comparisons, and financial projections. By reading multiple reports, investors may start to see common trends.

While analysts aren’t always correct and can’t predict global events that affect the markets, these reports can be a useful tool for investors. They can keep them up-to-date on any key happenings that may be on the horizon for particular companies. The information in the reports also can result in stock prices going up or down, since investors will react to the predictions.

Quantitative vs Qualitative Analysis

Here’s a quick rundown looking at the key differences between quantitative and qualitative analysis. Again, this can be important when weighing your risk need to knows as an investor.

Quantitative vs. Qualitative Analysis
Quantitative Analysis	Qualitative Analysis
Looks at data and numerical figures to predict price movements	Looks at business factors such as leadership, product, and industry
May require sifting through a lot of data, and may be difficult for some investors	Metrics include business models, competitive advantage, and industry trends
Concerned more with the “quantity” and hard data a business produces	Concerned more with the “quality” of a business

Pros and Cons of Doing Your Own Stock Analysis

If you feel like you can do a little stock analysis on your own, there are some pros and cons to it.

Pros

Perhaps the most obvious pro to doing your own stock analysis is that you don’t need to pay someone else to do it, you can do it on your own schedule, and learn as you go. You can develop knowledge that’ll likely help you as you continue to invest in the future. There are also numerous tools out there that you can use to analyze stocks which may not have been around in years or decades past.

Cons

Stock analysis can be an involved process, which can require a lot of investment in and of itself — both monetarily (if you’re using paid tools) and in terms of time. Depending on how deep you want to go, too, it can be a complex process. You may get frustrated or burnt out, or even make a mistake that leads to a bad investment decision.

💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Buying Stocks With SoFi

There are a number of ways to analyze stocks, including technical, fundamental, quantitative, and qualitative analysis. The more an investor gets comfortable with terms like P/E ratio and earnings reports, the more informed they can be before making any decisions. Stock analysis is an involved process, however, and may be above the typical investors’ head and ability.

It is important to do your research and homework in relation to your investments, however. If you feel like you could use some guidance or a helping hand, speaking with a financial professional is never really a bad idea.

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).

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.

FAQ

What is the best way to analyze a stock?

There’s no “best” way to analyze stocks. The right option for an investor will depend on their personal preferences and investing objectives. And remember, there’s no need to just use one method to analyze a stock — often, analysts will combine different methods of analysis to generate a more robust stock analysis.

What are key indicators to look for when analyzing a stock?

There are a ton of potential indicators that investors can look at, but some broad indicators that investors can start with include stock price history, moving averages, a company’s competitive advantages, business models, and industry trends.

What is an example of stock analysis?

A very, very basic example of stock analysis would include looking at a stock’s share price, comparing it to its historical averages and moving averages, overall market conditions, and looking at the company’s financial statements to try and gauge where it might move next.

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