Intrinsic Value vs Market Value, Explained

Intrinsic value vs market value refers to the difference between where a stock is trading and where it ought to be according to its fundamentals. The term “market value” simply refers to the current market price of a security. Intrinsic value represents the price at which investors believe the security should be trading at. Intrinsic value is also known as “fair market value” or simply “fair value.”

According to Merriam-Webster dictionary, the word “intrinsic” means “belonging to the essential nature or constitution of a thing.” At times, stocks become overbought or oversold, meaning their market price can rise above or below their intrinsic value.

When it comes to value vs. growth stocks, value investors look for companies that are out of favor and below their intrinsic value. The idea is that sooner or later stocks return to their intrinsic value.

What Is Market Value?

In a sense, there is only one measure of market value: what price the market assigns to a stock, based on existing demand.

stock market crash, for example, fear may grip investors and the market value of many stocks could fall well below their fair market values.

News headlines can drive stock prices above or below their intrinsic value. After reading an earnings report that’s positive, investors may pile into a stock. Even though better-than-expected earnings might increase the intrinsic value of a stock to a certain degree, investors can get greedy in the short-term and create overextended gains in the stock price.

The rationale behind value vs price, and behind value investing as a whole, is that stocks tend to overshoot their fair market value to the upside or the downside.

When this leads to a stock being oversold, the idea is that investors could take advantage of the buying opportunity. It’s assumed that the stock will then eventually rise to its intrinsic value.

What Is Intrinsic Value?

The factors that can be used to determine intrinsic value are related to the fundamental operations of a company. It can be tricky to figure how to evaluate a stock. Depending on which factors they examine and how they interpret them, analysts can come to different conclusions about the intrinsic value of a stock.

It’s not easy to come to a reasonable estimation of a company’s valuation. Some of the variables involved have no direct physical, measurable counterpart, like intangible assets. Intangible assets include things like copyrights, patents, reputation, consumer loyalty, and so on. Analysts come to their own conclusions when trying to assign a value to these assets.

Tangible assets include things like cash reserves, corporate bonds, equipment, land, manufacturing capacity, etc. These tend to be easier to value because they can be assigned a numerical value in dollar terms. Things like the company’s business plan, financial statements, and balance sheet have a tangible aspect in that they are objective documents.

Calculating Intrinsic Value vs Market Value

There can be multiple different ways to determine the intrinsic value of an asset. These methods are broadly referred to as valuation methods, or using fundamental analysis on stocks or other securities. The methods vary according to the type of asset and how an investor chooses to look at that asset.

Calculating Intrinsic Value

For dividend-yielding stocks, for example, the dividend discount model provides a mathematical formula that aims to find the intrinsic value of a stock based on its dividend growth over a certain period of time. Here is what is a dividend: periodic income given to shareholders by a company.

market cap is:

Total number of outstanding shares multiplied by the current stock price.

Dividing market cap by number of shares also leads to the current stock price.

Sometimes companies engage in “corporate stock buybacks,” whereby they purchase their own shares, which reduces the total number of shares available on the market.

This increases the price of a stock without any fundamental, tangible change taking place. Value investors might say that stocks pumped up by share buybacks are overvalued. This process can lead to extreme valuations in stocks, as can extended periods of market euphoria.

The Takeaway

Using the intrinsic value vs market value method is best suited to a long-term buy-and-hold strategy.

Stock prices can remain elevated or depressed for long periods of time depending on market conditions. Even if an investor’s analysis is spot on, there’s no way to know for sure exactly when any stock will return to its intrinsic value.

Value investors try to understand stock volatility, using these periods as opportunities for rebalancing their portfolios, selling positions that might have increased a lot while adding to positions that may have fallen far below their intrinsic value. This contrasts to short-term day trading strategies or momentum swing-trading, which primarily uses technical analysis to try and predict and profit from short-term market fluctuations.

Found a stock you think is undervalued? Try SoFi Invest®, where investors can choose any of the most popular stocks and ETFs.

Check out SoFi Invest today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN20282

Source: sofi.com

What is Dash Cryptocurrency?

Cryptocurrency can sometimes be confusing to beginners because there are so many different cryptocurrency types with different purposes. Some cryptocurrencies are designed to act as fast digital cash, others as private digital cash, some as interest-bearing assets, others as cross-currency exchanges, and more. (Beginners can check out our comprehensive crypto guide for more details.)

Bitcoin is widely known as the premier cryptocurrency in large part because it was the first, yet altcoins such as Dash take existing intuitive technology and make other improvements upon it separately. Some of Bitcoin’s biggest flaws are precisely Dash’s strengths—including transaction speeds, fees, and privacy.

What is Dash?

Bitcoin fork, a split in the Bitcoin blockchain initiated by a group of Bitcoin miners with different views on certain network rules. Darkcoin was originally designed to uncompromisingly ensure user privacy and anonymity, as described in its 2014 whitepaper .

However, the next year the project was redesigned with other features in mind and rebranded as “Dash,” a mash-up of the phrase “digital cash.” As the name implies, the Dash coin is intended as a medium of exchange and has since shifted its primary focus to faster and less expensive transactions while maintaining its strong encryption properties. Since the 2015 rebranding, Dash has grown to become a popular altcoin for investors buying crypto and consistently ranks among the top 25 cryptocurrencies by market cap.

How Does Dash Work?

Similar to Ethereum’s ambitions, Dash uses a modification of the Proof of Stake algorithm known as X11. Proof of Stake is an alternative consensus mechanism to Bitcoin’s Proof of Work that replaces energy-intensive cryptocurrency miners with validators that verify transactions based on how many tokens they hold and stake on the network. In addition to confirming blocks, they also provide payment and privacy services on the network.

This model is viewed as less risky because it makes a potential network attack less rewarding than compensation for validating transactions which secure the network. Dash validators, or “Masternodes,” are full nodes that hold a minimum stake (or bond of collateral) of 1,000 DASH coins that perform network services and earn a return on their staked investment. Masternode services include private transactions (PrivateSend), Instant transactions (InstantSend), and the network’s governance and treasury systems. Dash’s model also addresses transaction scalability issues by reducing the amount of nodes required to approve a transaction to a manageable number.

Dash maintains a harmonious self-funding governance model by splitting block rewards between three critical stakeholders: Masternodes (45%), Miners (45%), and Treasury (10%). The first two are rewarded the bulk of block rewards for providing essential services and voting on development directions for the network, while the remaining 10% accrues to the Treasury to actually finance the voted-on future project developments.

What is Dash Used For?

Dash is intended to be used for daily transactions between peers. While Dash’s use is scattered, it is more concentrated in a few economically-distressed countries that are experimenting with cryptocurrencies.

Following the hyperinflation of the Venezuelan Bolivar, the South American country’s government passed an order instructing state-run agencies to accept any cryptocurrency for services. Dash has gained early momentum in the country after a series of popular conferences and educational efforts were made introducing crypto to the community as a replacement for devalued and unreliable local currency. Since then, acceptance of Dash in Venezuela has grown as thousands of merchants in the country, including Burger King, have enabled payments using Dash among other cryptos.

Dash adoption and use has spread in Latin America, also spurring bouts of growth in Brazil and interest from nearby Cabimas and Mexico, other countries with distressed economies and weak currencies. This comes as a result of local advocacy programs and merchant point-of-sale terminals integrating with Dash.

Is Dash Better than Bitcoin?

Some people prefer Dash for its fast speed, lower fees, and increased privacy. These properties give Dash technical advantages over Bitcoin’s current abilities as a medium of exchange.

Faster Speeds

One of the drawbacks to using a layer-one cryptocurrency network is that some network efficiency is sacrificed for decentralization. Many cryptocurrencies, like Bitcoin, still operate on the project’s original iteration which is designed for functionality now and scalability later. This affects the network’s speed, particularly the rate at which funds are transferred, confirmed, and received in recipients’ accounts. Bitcoin is the model for slow transaction times, sometimes taking hours for a transaction to be confirmed, especially during market congestion.

With Dash, most transactions are confirmed in seconds. As the name implies, Dash coins are meant to be used as a medium of exchange. Dash’s average block time is roughly two and a half minutes per transaction; nearly four times faster transactions than Bitcoin’s 10-minute block time. Dash users are free to send and receive transactions normally for a miniscule fee. Alternatively, Dash also instituted the InstantSend feature which allows masternodes to confirm transactions nearly instantly for an extra fee. With nearly instant transaction confirmations, Dash is among the fastest and most private cryptocurrency mediums of exchange, surpassing that of Bitcoin, Ethereum, Litecoin, and XRP.

There are other cryptocurrencies that also provide fast transaction confirmations like Dash, however only some of them lock down transactions after they are completed, thus disabling the same funds from being spent on two separate transactions. Networks that do not lock down confirmed transactions are technically vulnerable to a compromising phenomenon known as double spending. Double spending is a potential technical flaw in a digital currency network where the same single asset is spent more than once. InstantSend also solves the double spending issue by holding the amount of funds sent without having to wait for a block confirmation to officially confirm the transaction.

Lower Fees

In addition to faster block times, Dash transactions typically cost less than $0.01. Dash’s faster speeds and lower fees make it a far more efficient medium of exchange than cryptocurrencies like Bitcoin.

Privacy

One of the concerns with Bitcoin, according to privacy advocates, is its public ledger. All transactions and details on the Bitcoin blockchain such as sender, recipient, date, amount, and even previous Bitcoin addresses and transactions associated with each Bitcoin are publicly viewable by anyone and cannot be censored, modified, or deleted. While this creates a system of pseudo-honesty and transparency, users seeking privacy must look elsewhere.

Dash offers users a service known as “PrivateSend,” a layer of privacy and anonymity provided by Masternodes through a process known as automatic coinjoin mixing. Coinjoin mixing is a trustless privacy method that repackages multiple payments from multiple senders into a single transaction to obfuscate transaction details from outside parties.

Anonymizing Dash cryptocurrency transactions prevents them from being traced and users’ identities from being revealed, thus potentially providing an opportunity for users seeking to avoid paying taxes on crypto. Dash’s anonymizing privacy features are revered by users but scrutinized by regulators and centralized exchanges who must abide by strict cryptocurrency regulations.

Dash Crypto: Pros and Cons

When it comes to crypto, pros and cons can vary depending on what a user intends to do with the currency—whether interest-bearing assets or fast digital cash, for example.

Beyond the specific advantages Dash has over Bitcoin (outlined above), this cryptocurrency has pros and cons any potential user should be aware of.

Pros

•  Widely Accessible: Dash is available to buy or sell on most crypto exchanges in most countries with few exceptions. Being that Dash is a relatively larger-cap token, it is fairly ubiquitous—except for exchanges unfriendly to privacy-centric cryptocurrencies.
•  Efficient medium of exchange: Faster transaction speeds and cheaper fees make Dash a top-performing medium of exchange, especially when compared to wait times and fees experienced by users of marquee tokens like Bitcoin and Ethereum.
•  Private and anonymous: Darkcoin’s original privacy properties were maintained in Dash, autonomously obscuring transactions’ origins, senders, and other details by grouping transactions together to morph into a single new transaction with no similarities to the original senders.
•  Validators can stake DASH coins to earn passive block rewards: Validators, or nodes, attribute personally-owned DASH as part of the consensus mechanism to receive monetary compensation for providing crucial services to process transactions and secure the network.

Cons

•  Not as ubiquitous as mega-cap cryptos (e.g. Bitcoin, Ethereum): Whereas crypto is synonymous with Bitcoin and sometimes Ethereum, Dash doesn’t have the same caliber network effect and is not widely known by the average investor.
•  Masternodes are slightly more centralized than other cryptos: Owning and running a masternode requires staking 1,000 DASH, and there are currently more than 5,000 masternodes. However, it’s difficult to determine whether some people have multiple masternodes and thus centrally control a larger percentage of the network.
•  No academic or institution backing: Dash is entirely self-funded through its technical design and does not rely on nor receive support from prominent academics or institutions for advisement, technical support, or funding.
•  Strong competition (Bitcoin Cash, Litecoin, Monero, etc.): Currencies have been battling for the title of reserve currency for hundreds of years. The medium of exchange use case is saturated to say the least, and of the thousands of cryptocurrencies (and growing), Dash has to compete with other functional and efficient use cases with similar properties such as Bitcoin Cash, Litecoin, and others.

How Do You Invest in Dash?

6 things to know before investing in crypto.

The Takeaway

As cryptocurrency evolves, new projects are conceived and even spawn off of other projects in what’s known as a “fork.” One such fork is Dash, a 2015 offshoot of Bitcoin with many similarities but distinct improvements in critical areas that define money’s essence. Bitcoin historically dominates the crypto market share despite technical limitations, whereas projects like Dash have a smaller network effect and thus market cap despite superior real-world utility.

Regardless of your crypto project of choice, the vast number of cryptocurrency projects and tokens are showing a rapidly growing and maturing space that has already caused ripples in the investing world. As cryptocurrencies like Dash continue to become more mainstream, investors may look to capitalize on this new industry’s growth and adoption.

For investors looking to dip their toes in cryptocurrency investing without the responsibility of self-custodying their funds, SoFi Invest® helps beginners get started and learn along the way. Members can invest in Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ethereum Classic.

Find out how to invest in cryptocurrency with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.

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Source: sofi.com

NASDAQ Listing Requirements Explained

Before a stock can be traded by investors, it must first be listed on an exchange. Different stock exchanges can have physical locations with in-person trading or be entirely electronic. After the New York Stock Exchange (NYSE), the Nasdaq is the second largest stock exchange in the world.

Not just any company can be listed for trading on the Nasdaq, however. There are specific Nasdaq listing requirements that must be met as a condition of inclusion. These rules are designed to ensure that only reputable companies can trade on the exchange.

Understanding Nasdaq listing rules and how a stock exchange works can be helpful when mapping out an investing strategy and determining which stocks to purchase. Because exchanges play such an important role in stock listings, these requirements can also serve as a tech IPO guide for investors.

Here’s a closer look at how the Nasdaq works and what’s required for a company to be listed on the exchange.

What is the Nasdaq?

The Nasdaq play an important role in the history of the stock market. It’s an electronic stock exchange founded in 1971 by the National Association of Securities Dealers. Nasdaq is an acronym for National Association of Securities Dealers Automatic Quotations.

In terms of how many companies are on Nasdaq, the exchange lists approximately 5,000 common stocks. Those stocks represent a diverse range of industries, including financial services, health care, retail and tech stocks.

In addition to identifying the stock exchange itself, the term “Nasdaq” can also be used as shorthand when referencing the Nasdaq Composite Index. This stock market index tracks the performance of approximately 3,000 stocks listed on the Nasdaq exchange.

The Nasdaq Composite is a capitalization-weighted index, meaning its makeup is determined by market capitalization. Market cap is a measure of a company’s value as determined by its share price multiplied by the total number of outstanding shares. The Nasdaq Composite includes some of the largest U.S. companies by market cap.

Nasdaq Listing Requirements

The Nasdaq doesn’t include every publicly traded company in the U.S. In order to be included on the exchange, companies must first meet Nasdaq listing rules. These rules apply to companies that are seeking to have common stocks on the exchange.

Nasdaq listing requirements span a number of criteria:

•  Earnings
•  Cash flow
•  Market capitalization
•  Revenue
•  Total assets
•  Stockholders’ equity
•  Bid price

The Nasdaq listing rules allow companies to qualify under one of four sets of standards, based on the criteria listed above.

Standard 1: Earnings

A company’s earnings are a reflection of its profitability. To qualify for listing on the Nasdaq based on earnings alone, a company must be able to show:

•  Aggregate pre-tax earnings of $11 million or more for the three prior fiscal years
•  Earnings of $2.2 million or more for the two most recent fiscal years
•  Zero net losses for each of the three prior fiscal years

For a company to be included under this standard, they have to be able to check off all three of these boxes. If they can meet two criteria but not a third, they won’t be able to qualify for listing.

Standard 2: Capitalization with Cash Flow

Capitalization is a measure of a company’s size in relation to the rest of the market. Cash flow tracks the movement of cash in and out of a company. To qualify for Nasdaq listing under the capitalization with cash flow standard, the following rules apply:

•  Aggregate cash flow of $27.5 million or more in the prior three fiscal years
•  Zero negative cash flow for the prior three fiscal years
•  Average market capitalization of $550 million or more over the prior 12 months
•  Revenue of $110 million or more for the previous fiscal year

Again, all four of those conditions have to be met to qualify for Nasdaq listing using this standard.

Standard 3: Capitalization with Revenue

The third Nasdaq listing standard focuses on company size and revenue, which is a measure of income. The minimum requirements for both are as follows:

•  Average market capitalization of $850 million or more over the prior 12 months
•  Revenue of $90 million or more for the previous fiscal year

Larger companies may opt to take this route if they can’t meet the cash flow requirements under Standard 2.

Standard 4: Assets with Equity

In lieu of earnings or market capitalization, companies can use their assets and the value of shareholders’ equity to qualify for listing on the Nasdaq. There are three specific thresholds companies have to meet:

•  Market capitalization of $160 million
•  Total assets of $80 million
•  Stockholders’ equity of $55 million

Regardless of which standard a company uses to qualify for listing, they have to maintain them continually. Otherwise, the company could be delisted from the Nasdaq exchange.

General Nasdaq Listing Rules

Aside from meeting the listing requirements set forth for each standard, there are some general Nasdaq listing requirements companies have to observe.

For example, the Nasdaq minimum share price or bid price for inclusion is $4. It’s possible to qualify with a bid price below that amount but that may entail meeting additional requirements.

Companies must also have at least 1.25 million publicly traded shares outstanding. That threshold applies to both seasoned companies and those seeking their initial public offering (IPO). Additionally, IPO requirements specify that the market value of those shares must be at least $45 million. For seasoned companies, the market value requirement increases to $110 million.

Nasdaq listing rules also cover criteria related to corporate governance. Under those requirements, companies must:

•  Make annual and interim reports available to shareholders
•  Have a majority of independent directors on the board of directors
•  Adopt a code of conduct that applies to all employees
•  Hold annual meetings of shareholders
•  Avoid potential or actual conflicts of interest

Companies must also pay a listing fee to gain entry to the Nasdaq. Entry fees can range from $150,000 to $295,000, depending on the total number of shares outstanding. Those amounts include a non-refundable $25,000 application fee. Paying the fee doesn’t guarantee that a company will be listed on the Nasdaq.

How to Choose NASDAQ Stocks

Knowing how stocks are chosen for the Nasdaq and other exchanges can be helpful in conducting your own research when deciding what to buy or sell. Listing on the Nasdaq or NYSE can also be important for a company in terms of which exchange-traded fund it gets added into. Broadly speaking, there are two ways to approach stock research: technical analysis and fundamental analysis.

Technical analysis focuses on market trends, momentum and day-to-day movements in stock pricing. You may use a technical analysis approach for choosing stocks if you’re an active day trader who’s interested in capitalizing on market trends to make short-term gains.

Using fundamental analysis on stocks, on the other hand, focuses on a company’s financial health. That includes things like earnings, profitability and how much debt the company has. Using a fundamental approach may be preferable if you favor a long-term, buy-and-hold strategy. And fundamental analysis echoes how the Nasdaq and other stock exchanges determine which stocks to include.

The Takeaway

Becoming a savvy investor starts with learning the basics of how the stock market and stock exchanges such as the Nasdaq work. Understanding Nasdaq listing requirements can offer insight into how stock exchanges select which companies to offer for trading.

When you’re ready to invest, you can use an online platform like SoFi Invest® to begin. It’s possible to start investing with as little as $1 and build a diversified portfolio that includes individual stocks and low-cost exchange-traded funds (ETFs) from the Nasdaq as well as other exchanges.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SOIN21048

Source: sofi.com

Understanding Cash in Lieu of Fractional Shares

It’s not uncommon for publicly-traded companies to restructure based on changing market conditions or share prices. When companies merge, split their stock, or acquire competitors, it can raise the question of how to consolidate or restructure the company’s stock.

If such a corporate action generates fractional shares, the company’s leadership has a few options for how to proceed: They could distribute the fractional shares, round up to the nearest whole share, or pay cash in lieu of fractional shares.

What is Cash In Lieu?

stock price, or both.

There are several company events that can lead to investors receiving cash in lieu of fractional shares.

Stock Split

A stock split occurs when a company’s board of directors determines that their company’s strongly performing stock price may be too high for new investors. To make the stock price look more attractive to more investors and gain more liquidity and marketability, a stock split is executed to artificially lower the stock’s price by issuing more shares at a fixed ratio while maintaining the company’s unchanged value.

Depending on the predetermined ratio, a stock split could cause fractional shares to be generated. For example, a three-for-two stock split of a stock worth $111 would create three shares for every two shares each investor holds. Thus, a stock split would cause any investor with an odd number of shares to receive a fractional share.

However, if the company’s board isn’t keen to hold or deal with fractional shares, they will distribute investors’ whole shares and liquidate the uneven remainders, thus paying investors cash in lieu of fractional shares. The ratio or cash rate as set by the company performing the stock split can be located on the company’s corresponding SEC 8-K document.

reverse stock split because a stock’s prices are too low and they want to artificially raise them. If stock prices get too low, investors may become fearful to buy and the stock risks being delisted from exchanges.

When a stock undergoes a reverse stock split, each share is converted into a fraction of a share but higher-priced shares are issued to investors according to the reverse split ratio . For example, a stock valued at $3.50 may undergo a reverse one-for-10 stock split. Every 10 shares is converted into one new share valued at $35.00. Investors who own 33 shares or any number indivisible by 10 would receive fractional shares unless the company decides to issue cash in lieu of fractional shares.

Companies may notify their shareholders of an impending reverse stock split on Forms 8-K, 10-Q, or 10-K as well as any settlement details if necessary.

Merger or Acquisition

Company mergers and acquisitions (M&As) can also create fractional shares. When companies combine or are absorbed, they combine new common stock using a predetermined ratio, which often results in fractional shares for investors in all involved companies.

In these cases, it’s rare for the ratio of new shares received to be a whole number. Companies may opt to return whole shares to investors, sell fractional shares, and disburse cash in lieu to investors.

Spinoff

If an investor owns shares of a company that spins off part of the business as a new entity with a separately-traded stock, shareholders of the original company may receive a fixed amount of shares of the new company for every share of the existing company held.

How Is Cash in Lieu of Fractional Shares Taxed?

Just like many other forms of investment profits, cash in lieu of fractional shares is taxable , even though it was acquired without the investor’s endorsement or action. The stock’s company may send investors a check followed by an IRS Form 1099-B at year-end with a “cash in lieu” or “CIL” notation.

Some investors may simply report the payment on the IRS Form 1040’s Schedule D as sales proceeds with zero cost and pay capital gains tax on the entire cash settlement. However, the more accurate and tax-advantageous method would apply the adjusted cost basis to the fractional shares and pay capital gains tax only on the net gain.

Looking to Trade Fractional Shares?
SoFi Invest Can Help with That.

How to Report Cash in Lieu of Fractional Shares

Calculating the cost basis for cash in lieu of fractional shares is a little tricky due to the change of share price and quantity. The new stock issued is not taxable nor does the cost basis change, but the per-share basis does.
Consider the following example:

•  An investor owns 15 shares of Company X worth $10.00 per share ($150 value).
•  Investor’s 15 shares have a $7.00 per share cost basis ($105 total cost basis).
•  Company X declares a 1.5 stock split.

The investor is entitled to 22.5 shares valued at $6.67 each but the company states they will only issue whole shares. Therefore, the investor receives 22 shares plus a $2.73 cash in lieu payment for the half share.

The investor’s total cost basis remains the same, less the cash in lieu of the fractional shares. However, the adjusted cost basis now factors in 22 shares instead of 15, equaling a $4.66 per share cost basis and a $2.33 fractional share cost basis. Finally, the taxable “net gain” for the cash payment received in lieu of fractional shares equates to $2.725 – $2.33 = $0.39.

The Takeaway

It’s not always possible to anticipate a company being restructured and how it will affect shareholders’ stock. In the event the company doesn’t wish to deal with fractional shares, it’s important for shareholders to understand the alternatives such as cash in lieu of fractional shares, and how it affects them. While cash in lieu can be burdensome, investors can be made whole and can then proceed on their own accord.

There are many reasons investors consider fractional shares worth buying to add to their investment portfolio. For individuals looking to invest in fractional shares with the help of a simple account setup and no fees, SoFi Invest® can help.

Find out how SoFi Invest can help you reach your financial goals.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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Source: sofi.com