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.


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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.
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Price-to-Rent Ratio in 50 Cities

Better to buy or rent? The price-to-rent ratio helps to gauge affordability in any city, especially for people on the move, and millions of Americans are, thanks in part to a remote-work boom.

The number can be helpful when looking at a certain area and deciding whether to plunk down your life savings into a home—if it’s even within reach—or pay a landlord and wait.

Read on to see the home price-to-rent ratio in 50 of the biggest U.S. cities.

First, What Is the Price-to-Rent Ratio?

The price-to-rent ratio compares the median home price and median annual rent in a given area. (You’ll remember that the median is the midpoint, where half the numbers are lower and half are higher.)

Median home sale price divided by median annual rent equals the ratio.

Let’s say the median rent in a city is $3,000 a month and the median sale price is $1,000,000. The price-to-rent ratio would be nearly 28—$1,000,000 divided by $36,000.

To make sense of that number:

•  A ratio of 1 to 15 typically indicates that it is more favorable to buy than rent in a given community.
•  A ratio of 16 to 20 indicates it is typically better to rent than buy.
•  A ratio of 21 or more indicates it is much better to rent than buy.

The ratios could be useful when considering whether to rent or buy. And investors often look at the ratios before purchasing a rental property.

The number also may be used as an indicator of an impending housing bubble, as a substantial increase in the ratio could mean that renting is becoming a much more attractive option in that specific housing market.

If you’re exploring different areas, it might be a good idea to estimate mortgage payments based on median home prices.

A Snapshot of Real-Life Ratios

Here are 50 (plus one) popular metropolitan areas and their price-to-rent ratios as 2021 began, when the U.S. median home sale price was $346,800, the Federal Reserve Bank of St. Louis reported.

Median sale price listed comes from Redfin as of December 2020. Median rents listed come from a Zumper national rent report from February 2021, based on a one-bedroom apartment.

Remember, as home prices and rents shift over time, so do the ratios.

San Francisco

It’s no secret that San Francisco housing prices are way up there. The median sale price was $1,350,000, and median rent was $2,680 per month (or $32,160 a year). That gives the hilly city a price-to-rent ratio of 42.

A snug studio at, say, $2,000 a month yields a ratio of 56.

San Jose, Calif.

Golden State housing continues its pricey rep. The median sale price in San Jose was $1,050,000, and the city had median rent of $25,560 yearly ($2,130 a month), leading to a price-to-rent ratio of 41.

Seattle

The Emerald City had a median sale price of $725,000 and median annual rent of $20,388, for a price-to-rent ratio of close to 39.

Los Angeles

A median sale price of $831,000 and median one-bedroom rent of $23,280 a year ($1,940 a month) shines a Hollywood light on renting, with a ratio of 36.

Long Beach, Calif.

With a median home price of $675,000 and rent of $1,600 a month, Long Beach earned a ratio of 35.

Santa Ana and Anaheim, just north of Santa Ana, were in the same league, with ratios of 33 and 34.

Honolulu

The ratio in the capital of Hawaii is a steamy 35, with a $620,000 median sale price and median rent of $17,520.

Oakland, Calif.

Oakland, across the bay from San Francisco, had a median sale price of $785,000 and median rent of $24,000 a year ($2,000 a month), earning a price-to-rent ratio of close to 33.

Austin, Texas

A hotbed for artists, musicians, and techies, Austin had a price-to-rent ratio of 33, thanks to a median sale price of $475,000 and median annual rent of $14,400.

San Diego

Hop back to Southern California beaches and “America’s Finest City,” where a median sale price of $690,000 and median rent of $21,600 led to a ratio of 32.

New York, NY

The median sale price here was $725,000 and median rent was $28,200 a year ($2,350 a month), which equates to a price-to-rent ratio of nearly 26.

Of course the city is composed of five boroughs, the Bronx, Brooklyn, Manhattan, Queens, and Staten Island, and it’s probable that most of the sales under $725,000 were not in Manhattan (where the median was $1.18 million) or Brooklyn (where the median was $915,000).

Just looking at Manhattan, even with rents falling to under $3,000 a month, the ratio looks more like 34 or 35.

Boston

With a median sale price of $702,000 and median rent of $24,240 a year, Beantown had a price-to-rent ratio of 29.

Portland, Ore.

The midpoint of buying here of late was $485,000, compared with median rent of $16,800, for a price-to-rent ratio of 29.

Tucson, Ariz.

In Tucson, the median sale price of $251,000 and median annual rent of $8,760 rounded up to a ratio of 29.

Denver

The Mile High City logged a renter-leaning ratio of 28, thanks to a median sale price of $476,000 and median annual rent cost of $16,800.

Colorado Springs, Colo.

With a median sale price of $366,000 and annual rent of $13,080, this city at the eastern foot of the Rocky Mountains had a recent price-to-rent ratio of 28.

Albuquerque, N.M.

In the Southwest, Albuquerque heated up to a ratio of 28, based on a median home sale price of $250,000 and rent of $8,880.

Washington, D.C.

The nation’s capital is another pushpin on the map with a high cost of living. The median sale price of $640,650 compares with median rent of $23,520 annually ($1,960 a month), translating to a ratio of 27.

Mesa, Ariz.

With a median sale price of $325,000 and median rent of $12,240, Mesa slithers to a price-to-rent ratio of nearly 27.

Las Vegas

Sin City has reached a ratio of 26, based on a $314,900 median sale price vs. $12,000 in rent.

Phoenix

Phoenix’s price-to-rent ratio has revved up to 26, with a median home sale price of $320,000 and $12,120 in rent.

Raleigh, N.C.

The North Carolina capital, the City of Oaks, logs a ratio of 25, based on a $320,000 median home sale price and median rent of $12,600.

Tulsa, Okla.

Tulsa had a price-to-rent ratio of 25, with low median rent of $7,680 but home sale prices ticking up to a median of $192,000.

Dallas

This sprawling city had a recent median sale price of $374,000 and median annual rent of $14,640, leading to a price-to-rent ratio of 25.5.

Sacramento, Calif.

This Northern California city had a recent median sale price of $402,000 and rent of $16,800, for a price-to-rent ratio of 24.

Fresno, Calif.

Fresno makes the list with a price-to-rent ratio of nearly 23, based on figures of $300,000 and $13,200.

Oklahoma City

The capital of Oklahoma had one of the lower price-to-rent ratios until recent home price spikes. It logs a ratio of 23 lately, based on figures of $215,000 and $9,240.

Arlington, Texas

Back to the Lone Star State, this city between Fort Worth and Dallas, with median figures of $250,000 and $11,400, had a ratio of 22.

San Antonio

This Texas city southwest of Austin had a median sale price of $244,000 and median annual rent of $11,280, resulting in a price-to-rent ratio near 22.

El Paso, Texas

El Paso traded a low price-to-rent ratio for a higher one when home prices rose. It’s at a 22, based on recent figures of $187,000 and $8,520.

Omaha, Neb.

With a median sale price of $206,750 and median annual rent of $9,600, Omaha had a recent home price-to-rent ratio of 21.5.

Nashville, Tenn.

The first Tennessee city on this list is the Music City, with a ratio of 21.

Virginia Beach, Va.

The ratio here has reached 21, based on a median home sale price of $290,000 and rent of $13,560.

Tampa, Fla.

This major Sunshine State city had a price-to-rent ratio of 20, based on figures of $290,000 and $14,400.

Jacksonville, Fla.

This east coast Florida city had a recent ratio of 20, based on a median sale price of $233,000 and rent of $11,640.

Charlotte, N.C.

Charlotte’s price-to-rent ratio of 20 arises from a median home sale price of $295,000 and median annual rent of $14,640.

Fort Worth, Texas

Panther City’s price-to-rent ratio has crept up to 20, based on a home sale price of $262,000 and rent of $12,960.

Houston

Houston, we have a number. It’s 20. That’s based on a median sale price of $269,000 and median annual rent of $13,200.

Louisville, Ky.

Despite having a different median sale price ($205,000) and rent ($10,440), Louisville had the same price-to-rent ratio as some bigger cities, at about 20.

Columbus, Ohio

The only Ohio city on this list had a price-to-rent ratio of 20, due to a median sale price of $208,000 and median annual rent of $10,320.

Atlanta

Heading South, Atlanta had a median sale price of $349,450 and median annual rent of $18,480, for a price-to-rent ratio of 19.

Miami

Those looking to put down roots in this vibrant city will find a price-to-rent ratio of a hair under 19, based on $360,000 and $19,200.

Minneapolis

The Mini-Apple is sweeter on renting, with a ratio of 19, based on a median sale price of $295,000 and rent of $15,600.

New Orleans

Next up is another charming Southern city, with a price-to-rent ratio of 18, given a median sale price of $312,500 and median rent of $17,040.

Kansas City, Mo.

In this Show-Me State city, a median home value of $218,000 and median annual rent of $12,000 equate to a price-to-rent ratio of 18.

Chicago

Chi-Town’s 16.5 ratio is based on a $305,000 median home sale price and $18,480 median rent.

Memphis, Tenn.

Memphis logs a ratio of 16, with a median home sale price of $163,000 and median annual rent of $9,960.

Indianapolis

The ratio in this capital city is 16, thanks to a median home sale price of $185,000 and rent of $11,280.

Philadelphia

This major East Coast city had a recent median sale price of $240,000 and median annual rent of $16,200, for a price-to-rent ratio of 15, the number that begins to signal that a place may be more favorable for buying over renting.

Baltimore

Charm City had a recent median home sale price of $198,000 and median rent of $14,160, for a price-to-rent ratio of 14.

Newark, N.J.

Newark, anyone? The median sale price here was $271,000, but median rent spiked to $1,750 a month, leading to a buyer-friendly ratio of 13.

Milwaukee

Milwaukee is more favorable to homebuyers than renters, thanks to a price-to-rent ratio of 11. This Midwest city had a recent median sale price of $155,000 and rent of $14,400.

Detroit

Detroit saw a spike in home sale prices, though the latest median was a relatively low $71,000, compared with median rent of $10,800, for a ratio of 6.5.

The Takeaway

The price-to-rent ratio lends insight into whether a city is more favorable to buyers or renters. Usually in a range of 1 to 21-plus, the ratio is useful to house hunters, renters, and investors who want to get the lay of the land.

If you’re in the market to buy, whether as a primary-home owner or investor, give SoFi mortgage loans a look.

SoFi home loans have competitive rates and no hidden fees. Plus, you may qualify for a loan with well under 20% down.

Interested in a home loan with SoFi? Find your rate in two minutes.



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What Is a Clearinghouse?

A clearinghouse is a financial institution that acts as a middleman between buyers and sellers in a market, ensuring that transactions take place even if one side defaults.

If one side of a deal fails, a clearinghouse can step in to fill the gap, thus reducing the risk that a failure will ripple across financial markets. In order to do this, clearinghouses ask their members for “margin”–collateral that is held to keep them safe from their own actions and the actions of other members.

While often described as the “plumbing” behind financial transactions, clearinghouses became high profile after the 2008 financial crisis, when the collapse of Lehman Brothers Holdings Inc. exposed the need for steady intermediaries in many markets.

Regulations introduced by the Dodd-Frank Act demanded greater clearing requirements, turning the handful of clearinghouses in the country into some of the most systemically important entities in today’s financial system.

Here’s a closer look at them.

How Clearinghouses Work

Clearinghouses handle the clearing and settlement for member trades. Clearing is the handling of trades after they’re agreed upon, while settlement is the actual transfer of ownership–delivering an asset to its buyer and the funds to its seller.

Other responsibilities include recording trade data and collecting margin payments. The margin requirements are usually based on formulas that take into account factors like market volatility, the balance of buy-versus-sell orders, as well as value-at-risk, or the risk of losses from investments.

Because they handle investing risk from both parties in a trade, clearinghouses typically have a “waterfall” of potential actions in case a member defaults. Here are the layers of protection a clearinghouse has for such events:

1. Margin requirements by the member itself. If market volatility spikes or trades start to head south, clearinghouses can put in a margin call and demand more money from a member. In most cases, this response tends to cover any losses.
2. The next buffer would be the clearinghouse’s own operator capital.
3. If these aren’t enough to staunch the losses, the clearinghouse could dip into the mutual default fund made up from contributions by members. Such an action however could, in turn, cause the clearinghouse to ask members for more money, in order to replenish the collective fund.
4. Lastly, a resolution could be to try to find more capital from the clearinghouse itself again–such as from a parent company.

Are Clearinghouses Too Big to Fail?

Some industry observers have argued that regulations have made clearinghouses too systemically important, turning them into big concentrations of financial risk themselves.

These critics argue that because of their membership structure, the risk of default in a clearinghouse is spread across a group of market participants. And one weak member could be bad news for everyone, especially if a clearinghouse has to ask for additional money to refill the mutual default fund. Such a move could trigger a cascade of selling across markets as members try to meet the call.

Other critics have said the margin requirements and default funds at clearinghouses are too shallow, raising the risk that clearinghouses burn through their buffers and need to be bailed out by a government entity or go bankrupt–a series of events that could meanwhile throw financial markets into disarray.

Clearinghouses in Stock Trading

Stock investors have already probably learned the difference between a trade versus settlement date. Trades in the stock market aren’t immediate. Known as “T+2,” settlement happens two days after the trade happens, so the money and shares actually change hands two days later.

In the U.S., the Depository Trust & Clearing Corp. handles the majority of clearing and settling in equity trades. Owned by a financial consortium, the DTCC clears on average more than $1 trillion in stock trades each day.

Clearinghouses in Derivatives Trading

Clearinghouses play a much more central and pivotal role in the derivatives market, since with derivatives products are typically leveraged, so money is borrowed in order to make bigger bets. With leverage, the risk among counterparties in trading becomes magnified, increasing the need for an intermediary between buyers and sellers.

Prior to Dodd-Frank, the vast majority of derivatives were traded over the counter. The Act required that the world of derivatives needed to be made safer and required that most contracts be centrally cleared. With U.S. stock options trades, the Options Clearing Corp. is the biggest clearinghouse, while CME Clearing and ICE Clear U.S. are the two largest in other derivatives markets.

The Takeaway

Clearinghouses are financial intermediaries that handle the mechanics behind trades, helping to back and finalize transactions by members.

But since the 2008 financial crisis, the ultimate goal of clearinghouses has been to be a stabilizing force in the marketplace. They sit in between buyers and sellers since it’s hard for one party to know exactly the risk profile and creditworthiness of the other.

For beginner investors, it can be helpful to understand this “plumbing” that allows trades to take place and helps ensure financial markets stay stable.

Want to start investing but don’t know where to start? SoFi Invest® has financial planners ready to answer any questions. Investors can also choose between the Active Investing or Automated Investing platforms, depending on how hands-on or hands-off they want to be.

Check out SoFi Invest today.



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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.
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Understanding the Margin of Safety Formula

The margin of safety formula provides a way for investors to calculate a safe price at which to buy a security. This method derives from the value investing school of thought.

According to value investing principles, stocks have an intrinsic value and a market value. Intrinsic value is the price they ought to be trading at, while market value is its current price.

Figuring out the difference between these two prices, typically expressed as a percentage, is the essence of the margin of safety formula. Using it correctly can help protect investors from painful losses.

What is a Margin of Safety?

Making profitable investment decisions is largely about investment risk management. The risk involved in a trade needs to be balanced with the potential reward. In financial markets, taking greater risks often gives the potential for greater rewards but also for greater losses–a concept known as the risk-reward ratio.

both institutional and retail investors–all don’t always make the right call.
To try and correct for this possibility, value investors can determine their margin of safety when entering a position.

Expressed as a percentage, this figure is intended to represent the amount of error that could go into calculating the intrinsic value of a stock without ruining the trade. In other words, the percentage answers the question, “By what margin can I be wrong here without losing too much money?”

Who Uses the Margin of Safety Formula?

The margin of safety is typically used by investors of value stocks. Value investors look for stocks that could be undervalued, or trading at prices lower than they should be, to find profitable trading opportunities. The method for accomplishing this involves the difference between market value and intrinsic value.

The market value of a stock is simply what price it’s trading for at the moment. This fluctuates constantly and can extend well beyond intrinsic value during times of greed or fall far below intrinsic value during times of fear.

Intrinsic value is a calculation of what price a stock likely should be trading at based on fundamental analysis. There are several factors that determine a stock price and the analysis considers both quantitative and qualitative factors. That might include things like past, present, and estimated future earnings, profits and revenue, brand recognition, products and patents owned, or a variety of other factors.

After determining the intrinsic value of a stock, an investor could simply buy it if the current market price happens to be lower. But what if their calculations were wrong? That’s where a margin of safety comes in. Because no one can consider all of the appropriate factors and make a perfect calculation, factoring in a margin of safety can help to ensure investors don’t take unnecessary losses.

The margin of safety formula is also used in accounting to determine how far a company’s sales could fall before the company becomes unprofitable. Here we will focus on the definition used in investing.

How to Calculate Margin of Safety

The margin of safety formula works like this:

Margin of safety = 1 – [Current Stock Price] divided by [Intrinsic Stock Price]

Example Calculating Margin of Safety

Let’s look at a hypothetical case.

An investor wants to buy shares of company A for the current market price of $9 per share. After a thorough analysis of the company’s fundamentals, this investor believes the intrinsic value of the stock to be closer to $10. Plugging these numbers into the margin of safety formula yields the following results:

1 – (9/10) = 10%.

In this example, the margin of safety percentage would be 10%.

The idea is that an investor could be off on their intrinsic value price target by as much as 10% and theoretically not take a loss, or only a very small one.

How to Use Margin of Safety

Now an investor has determined their margin of safety. How might they use this figure?

To provide a substantial cushion for potential losses, an investor could plan to enter into a trade at a price lower than its intrinsic value. This could be done using the calculated margin of safety.

In the example above, say an investor decided that 10% wasn’t a wide enough margin, and instead wanted to be extra cautious and use 20%. They would then set a price target of $8, which is 20% lower than the stock’s estimated value of $10.

The Takeaway

In investing, the margin of safety formula is a way for investors to be extra careful when selecting an entry point in a security. By determining a percentage and placing a discount to a stock’s estimated value, an investor can find a mathematical framework with which they can try to be safer with their money.

how to value a stock, the margin of safety formula has a large subjective component, even though it’s meant to be rooted in math.

SoFi Invest makes it easy for investors to buy and sell stocks and exchange-traded funds (ETFs). Investors can try to apply the margin of safety formula to their own trades, while learning from educational tools and taking advantage of a user-friendly interface.

Try SoFi Invest and learn the basics 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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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A Guide to Qualified Retirement Plans

Saving for retirement is an important financial goal and there are different options when it comes to where to invest. A qualified retirement plan can make it easier to build wealth for the long term, while enjoying some significant tax benefits.

Qualified retirement plans must meet Internal Revenue Code standards for form and operation under Section 401(a). If you have a retirement plan at work, it’s most likely qualified. But not every retirement account falls under this umbrella and those that don’t are deemed “non-qualified.”

So just what is a qualified retirement plan and how is it different from a non-qualified retirement plan?
Understanding the nuances of these terms can help you better shape your retirement plan for growing wealth.

What Is a Qualified Retirement Plan?

Qualified retirement plans allow you to save money for retirement from your income on a tax-deferred basis. These plans are managed according to Employment Retirement Income Security Act (ERISA) standards.

The IRS has specific rules for what constitutes a qualified retirement plan and what doesn’t. Public employers can set up a qualified retirement plan as long as these conditions are met:

•  Employer contributions are deferred from income tax until they’re distributed and are exempt from social security and Medicare tax
•  Employer contributions are subject to FICA tax
•  Employee contributions are subject to both income and FICA tax

Following those guidelines, qualified retirement plans can include:

•  Defined benefit plans (such as traditional pension plans)
•  Defined contribution plans (such as 401(k) plans)
•  Employee stock ownership plans (ESOP)
•  Keogh plans

Section 403(b) plans, which you might have access to if you’re a public school or tax-exempt organization employee, mimic some of the characteristics of qualified retirement plans. But because of the way employer contributions to these plans are taxed the IRS doesn’t count them as qualified plans. The same is true for section 457(b) plans, which are available to public employees.

Defined Benefit vs. Defined Contribution Plans

When talking about qualified retirement plans and how to use them to invest for the future, it’s important to understand the distinction between defined benefit and defined contribution plans.

ERISA recognizes both types of plans, though they work very differently. A defined benefit plan pays out a specific benefit at retirement. This can either be a set dollar amount or payments based on a percentage of what you earned during your working career.

This type of defined benefit plan is most commonly known as a pension. If you have a pension from a current (or former) employer, you may be able to receive monthly payments from it once you retire, or withdraw the benefits you’ve accumulated in one lump sum. Pension plans can be protected by federal insurance coverage through the Pension Benefit Guaranty Corporation (PBGC).

Defined contribution plans, on the other hand, pay out benefits based on how much you (and your employer, if you’re eligible for a company match) contribute to the plan during your working years. The amount of money you can defer from your salary depends on the plan itself, as does the percentage of those contributions your employer will match.

Defined contribution plans include 401(k) plans, 403(b) plans, ESOPs and profit-sharing plans. With 401(k)s, that includes options like SIMPLE and solo 401(k) plans. But it’s important to note that while these are all defined contribution plans, they’re not all qualified retirement plans. Of those examples, 403(b) plans wouldn’t enjoy qualified retirement plan tax benefits.

What Is a Non-Qualified Retirement Plan?

Non-qualified retirement plans are retirement plans that aren’t governed by ERISA rules or IRC Section 401(a) standards. These are plans that you can use to invest for retirement outside of your workplace.

Examples of non-qualified retirement plans include:

•  Traditional IRAs
•  Roth IRAs
•  403(b) plans
•  457 plans
•  Deferred compensation plans
•  Self-directed IRAs
•  Executive bonus plans

While these plans can still offer tax benefits, they don’t meet the guidelines to be considered qualified. But they can be useful in saving for retirement, in addition to a qualified plan.

Traditional and Roth Individual Retirement Accounts

Traditional and Roth IRAs allow you to invest for retirement, with annual contribution limits. For 2020 and 2021, the maximum amount you can contribute to either IRA is $6,000, or $7,000 if you’re over 50.

Traditional IRAs allow for tax-deductible contributions. These accounts are funded using pre-tax dollars. When you make qualified withdrawals in retirement, they’re taxed at your ordinary income tax rate. IRAs do have required minimum distributions (RMD) starting at age 72.

Roth IRAs don’t offer the benefit of a tax deduction on contributions. But they do allow you to withdraw money tax-free in retirement. Unlike traditional IRAs, Roth IRAs do not have RMDs, meaning you don’t have to withdraw money until you want to.

A self-directed IRA is another type of IRA you might consider if you want to invest in stock or mutual fund alternatives, such as real estate. These IRAs require you to follow specific rules for how the money is used to invest, and engaging in any prohibited transactions could result in the loss of IRA tax benefits.

Advantages of Qualified Retirement Plans

Qualified retirement plans can benefit both employers and employees who are interested in saving for retirement.
On the employer side, the benefits include:

•  Being able to claim a tax deduction for matching contributions made on behalf of employees
•  Tax credits and other tax incentives for starting and maintaining a qualified retirement plan
•  Tax-free growth of assets in the plan

Additionally, offering a qualified retirement plan, such as a 401(k), can also be a useful tool for attracting and retaining talent. Employees may be more motivated to accept a position and stay with the company if their benefits package includes a generous 401(k) match.

Employees also enjoy some important benefits by saving money in a qualified plan. Specifically, those benefits include:

•  Tax-deferred growth of contributions
•  Ability to build a diversified portfolio
•  Automatic contributions through payroll deductions
•  Contributions made from taxable income each year
•  Matching contributions from your employer (aka “free money”)
•  ERISA protections against creditor lawsuits

Qualified retirement plans can also feature higher contribution limits than non-qualified plans, such as an IRA. If you have a 401(k), for example, you can contribute up to $19,500 for the 2020 and 2021 tax years, with an additional catch-up contribution of $6,500 for individuals 50 and older.

If you’re able to max out your annual contribution each year, that could allow you to save a substantial amount of money on a tax-deferred basis for retirement. Depending on your income and filing status, you may also be able to make additional contributions to a traditional or Roth IRA.

Making Other Investments Besides a Qualified or Non-Qualified Retirement Plan

Saving money in a qualified retirement plan or a non-qualified retirement plan doesn’t prevent you from investing money in a taxable account. With a brokerage account, you can continue to build your portfolio with no annual contribution limits. The trade-off is that selling assets in your brokerage account could trigger capital gains tax at the time of the sale, whereas qualified accounts allow you to defer paying income tax until retirement.

But an online brokerage account could help with increasing diversification in your portfolio. Qualified plans offered through an employer may limit you to mutual funds, index funds, or target-date funds as investment options. With a brokerage account, on the other hand, you may be able to trade individual stocks or fractional shares, exchange-traded funds, futures, options, or even cryptocurrency. Increasing diversification can help you better manage investment risk during periods of market volatility.

The Takeaway

While a qualified retirement plan allows investors to put away pre-tax money for retirement, a non-qualified plan doesn’t offer tax-deferred benefits. But both can be important parts of a retirement saving strategy.

Regardless of whether you use a qualified retirement plan or a non-qualified plan to grow wealth, the most important thing is getting started. Your workplace plan might be an obvious choice, but if your employer doesn’t offer a qualified plan, you do have other options.

Opening a traditional or Roth IRA online with SoFi Invest®, for example, can help you get a jump on retirement saving. Members can choose from a wide range of investment options or take advantage of a custom-build portfolio to invest.

Find out how an online IRA with SoFi might fit in to your financial plan.


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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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How an Employer 401(k) Match Works

Whether your retirement plans involve writing your memoir from a lovely little seaside cottage, a heated game of bocce against your (*ahem* sore loser) neighbor, or hitting up every farmers market in a 50-mile radius, a 401(k) is one savings strategy you can use to save money to get you there.

Simply put, a 401(k) is a mechanism for saving retirement funds by making pre-tax contributions through deductions from payroll. Some plans offer a 401(k) employer match, which can be the equivalent of getting “free money” from an employer.

A Quick Breakdown on 401(k) Plans

A 401(k) is an investment plan many employers offer their employees as a way to save for retirement. Employees can contribute either a percentage of or predetermined amount from each paycheck and, in some cases, the contributions can be matched by the employer up to a certain amount.

These deferred wages, also called “elective deferrals,” aren’t typically subject to federal income tax withholding, and are not listed as taxable income on the employee’s annual return.

If someone is self-employed, they can contribute to a one participant 401(k) plan plan with the same rules and requirements as an employer-sponsored 401(k) plan. Similarly, 457(b) plans can be used for public sector employees, and 403(b) plans for public schools and certain tax-exempt organizations.

Advantages of Participating in a 401(k)

A few advantages to participating in a 401(k) :

1. Investment gains and elective deferrals to 401(k) plans are not subject to federal income tax until they’re distributed, which is typically when:

•   The participant reaches the age of 59½
•   The participant becomes disabled, deceased, or otherwise has a severance from employment
•   The plan terminates and no subsequent plan is established by the employer
•   The participant incurs a financial hardship

2. Elective deferrals are 100% vested. The participant owns 100% of the money in their account, and the employer cannot take it back or forfeit it for any reason.

3. Participants choose how to invest their 401(k). The plans are mainly self-directed, meaning participants decide how they’d like to invest the money in their account. This could mean mutual funds or exchange-traded funds (ETFs) which invests in a wide array of sectors and companies, but typically doesn’t include investing in individual companies and stocks.

Investment tactics might vary from person to person, but by understanding their goals, investors can decide whether their portfolio will have time to withstand market ups and downs with some high-risk, high-reward investments, or if they should shift to a more conservative allocation as they come closer to retirement.

What About 401(k) Vesting Schedules?

“Vesting ” means “ownership” in a retirement plan. The employee will vest, or own, some percent of their account balance. In the case of a 401(k), being 100% vested means they’ve met their employer’s vesting schedule requirements to ensure complete ownership of their funds.

Vesting schedules, determined by 401(k) plan documents, can lay out certain employer vesting restrictions that range from immediate vesting to 100% vesting after three years to a schedule that increases the vested percentage based on years of service. Either way, all employees must be 100% vested if a plan is terminated by the employer or upon reaching the plan’s standard retirement age.

How Does a 401(k) Match Work?

A 401(k) match is an employee benefit that allows an employer to contribute a certain amount to their employee’s 401(k) plan. The match can be based on a percentage of the employee’s contribution, up to a certain portion of their total salary or a set dollar amount, depending on the terms of the plan.

Not all employers offer this benefit, and some have prerequisites for participating in the match, such as a minimum required contribution or a cap up to a certain amount.

Meeting with an HR representative or a benefits administrator is a one way to get a better idea of what’s possible. Learning the maximum percent of salary the company will contribute is a start, then the employee can set or increase their contribution accordingly to maximize the employer match benefit.

Benefits of a 401(k) Employer Match

According to a report from Fidelity Investments , the average employer 401(k) match reached a record high of 4.7% in 2019 and “boosted the average total savings rate to an all-time high of 13.5%.”

Many employees are taking advantage of this benefit. Some reasons they could benefit:

It’s Basically “Free Money”

An employer match is one part of the overall compensation package and another way to maximize the amount of money an employer pays their employees. Those employees could be turning their backs on free money by not contributing to an employer-matched 401(k) plan.

Reducing Taxable Income

According to FINRA , “with pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year. But your take-home pay will go down by less than a dollar.”

If a participant contributed $1,500 a year to a 401(k), they’d only owe taxes on their current salary minus that amount, which could save some serious money as that salary grows.

The Most Common Employer Match Formulas

Not all employer matches are created equal.

According to a recent report from Vanguard , “How America Saves,” among the 150 distinct match formulas administered through their employer-matched 401(k) plans in 2018:

•  70% of plans used a single-tier match formula, with the most commonly cited being $0.50 on the dollar on the first 6% of pay.
•  21% of plans used multi-tier match formulas, e.g., dollar-on-dollar on the first 3% of pay and $0.50 on the dollar on the next 2% of pay.

A Sample Employer Match 401(k) Scenario

For the sake of breaking a few things down, here’s a retirement saving scenario that can illuminate how 401(k) matching works in real life:

Let’s say a person is 30 years old, with a salary of $50,000, contributing 3% of their salary (or $1,500) to a 401(k). Let’s also say they keep making $50,000 and contributing 3% every year until they’re 65. They will have put $52,500 into their 401(k) in those 35 years.

Now let’s say they opt into an employer match with a dollar-for-dollar up to 3% formula. Putting aside the likelihood of an increase in the value of the investments, they’ll have saved $105,000— with $52,500 in free contributions from their employer.

That’s a no-cost way to increase retirement savings by 100%.

How Much Should a Participant Contribute?

The average 401(k) employee contribution amount, according to Fidelity , reached a record level of $2,370 in 2019. Still, there’s no across-the-board amount that will work for everyone.

When deciding how much to contribute to a 401(k) plan, many factors might be considered to take advantage of a unique savings approach:

•   If a company offers a 401(k) employer match, the participant might consider contributing enough to meet whatever the minimum match requirements are.
•   If a participant is closer to retirement age, they’ll probably have a pretty good idea of what they already have saved and what they need to reach their retirement goals. An increase in contributions can make a difference, and maxing out their 401(k) might be a solid strategy.

A retirement calculator can also be helpful in determining what the right contribution amount is for a specific financial situation.

Are There 401(k) Contribution Limits?

In addition to the uncertainty that can come with choosing how much to contribute to a 401(k), there’s the added pressure of potential penalties for going over the maximum 401(k) contribution limit.

Three common limits to 401(k) contributions :

1. Elective deferral limits: Contribution amounts chosen by an employee and contributed to a 401(k) plan by the employer. In 2020, participants can contribute up to $19,500.

2. Catch-up contribution limits: After the age of 50, participants can contribute more to their 401(k) with catch-up contributions. In 2020, participants can make up to $6,500 in catch-up contributions.

3. Employer contribution limits: An employer can also make contributions and matches to a 401(k). The combined limit (not including catch-up contributions) on employer and employee contributions in 2020 is $57,000.

If participants think their total deferrals will exceed the limit for that particular year, the IRS recommends notifying the plan to request the difference (an “excess deferral ”) “be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).”

Getting Started With Investing

Real, human advisors are a great outlet for discussing financial situations and potentially finding a retirement planning strategy that works for each investor (remember that beachside cottage?).

Opening a SoFi Invest® account lets you get started with as little as $1 and comes with complimentary access to financial advisors who are held to the highest fiduciary standards, meaning they’re required to act on your best interests. Try an exploratory conversation at no cost.

Start saving for retirement with SoFi Invest.



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®
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.

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.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Source: sofi.com

8 401(k) Investing Tips to Maximize Your 401(k)

The best kind of 401(k) plan is one that is used. The employer-sponsored retirement plan is typically easy to open and fund (with pre-tax dollars often deducted straight from your paycheck), and offers tax benefits vs. saving and investing in a brokerage account.

Understanding the nuances of this all-important savings vehicle may help catapult investors into full-blown expert territory, helping them maximize their 401(k) investing.

While everyone’s financial and retirement situation is different, there are some useful 401(k) investing tips that could be helpful to anyone using this popular investment plan to boost their retirement savings. These 401(k) should apply no matter what stage of retirement saving you’re in—as long as you’re participating in a 401(k).

1. Take Advantage of Your Employer Match
2. Consider Your Circumstances Before Contributing the Match
3. Understand Your 401(k) Investment Options
4. Stay the Course
5. Change Your Investments Over Time
6. Find—and Keep—Your Balance
7. Diversify
8. Beware Early Withdrawals

#1 Take Advantage of Your Employer Match

This first 401(k) tip is admittedly basic, but also probably the most important. Understanding your employer match is essential to making the most of your 401(k).

Also called a company match, an employer match is a contribution made to your 401(k) by your employer, but only when you contribute to your account first.

Withdrawing money early from a 401(k) can result in a hefty penalty.

There are some exceptions, depending on what you’ll use the withdrawn funds for. For example, qualified first-time home buyers may be exempt from the early distribution penalty. But for the most part, if you know you need to save for some big pre-retirement expenses, it may be better to do so in a non-qualified account.

Another consideration is whether to put all of your eggs in your 401(k) basket. Of course, these accounts can offer big benefits in terms of tax deferral and may come with a matching contribution from your employer as well. But individuals who are eligible to contribute to a Roth IRA, may consider splitting contributions between the two accounts.

While 401(k) contributions are made with pre-tax dollars and taxes are paid when you make a withdrawal, Roth IRA contributions are the opposite—taxed on the way in, but not on the way out (with some exceptions).

If you’re concerned about being in a higher tax bracket at retirement than you are now, a Roth IRA can make sense as a complement to your 401(k). The caveat is that these accounts are only available to people below a certain income level.

#3 Understand Your 401(k) Investment Options

The first step is contributing to a 401(k); the second is directing that money into particular investments. Typically, plan participants are able to choose from a list of mutual funds to invest in for the long-term. Some 401(k) plans may give participants the option of a lifecycle fund or a retirement target-date fund.

To pick the right mutual funds, you may want to consider what is being held inside those mutual funds. For example, a mutual fund that is invested in stocks means that you are now invested in the stock market.

With each option, ask yourself: Does the underlying investment make sense for your goals and risk tolerance? Are you prepared to stay the course in the event of a stock market correction?

You may also want to consider the fees charged by your mutual fund options, because any management fee will be subtracted from your potential future returns. When analyzing your options, look for what is called the expense ratio—that’s the annual management fee.

#4 Stay the Course

Many investors will have at least a part of their 401(k) money invested in the stock market, whether through mutual funds or by holding individual stocks.

If you’re not used to investing, it can be tempting to panic over small losses. This is also known as a day-trader mentality, and it is one of the worst things you can do—especially with a 401(k). Remember, investing in the stock market is generally considered for the long haul.

Getting spooked by a dip (or even a stock market crash like the one in 2008) and pulling your money out of the market is generally a poor strategy, because you are locking in what could possibly amount to be “paper” or temporary losses. The thinking goes, if you wait long enough, that stock might rebound and your loss will go away. (Though as always, past performance is no predictor of future success.)

It may help to remember that although stock market crashes are disappointing, they are a normal and natural part of the growth cycle. Remember, the goal is to be patient and let the stock market do its thing.

Some investors find it helpful to only check their 401(k) balance occasionally, rather than obsess over day-to-day fluctuations.

#5 Change Your Investments Over Time

Lots of things change as we age, and one of the most important 401(k) tips is to change your investing along with it. While some principles of retirement saving are eternal—use the employer match as much as you can, don’t trade too much, pay attention to fees—some 401(k) advice is specific to where you are relative to retirement.

While everyone’s situation is different and economic conditions can be unique, one rule of thumb is that as you get closer to retirement, it makes sense to shift the composition of your investments away from higher risk but potentially higher growth assets like stocks, and towards lower risk, lower return assets like bonds.

There are types of funds and investments that manage this change over time, like target date funds, that make this strategizing easier. Some investors choose to make these changes themselves as part of a quarterly or annual rebalancing.

#6. Find—And Keep—Your Balance

While you may want your 401(k) investments to change over time, at any given time, you should have a certain goal of how your investments should be allocated: a certain portion in bonds, stocks, international stocks, American stocks, large companies, small companies, and so on.

But these targets and goals for allocation can change over time even if your allocations and investment choices don’t change. That’s because certain investments may grow faster than others and thus, by no explicit choice of your own, they take up a bigger portion of your portfolio over time.

Rebalancing is a process where, every year or every few months, you buy and sell shares in the investments you have in order to keep your asset allocation where it was at the beginning of the year.

For example, if you have 80% of your assets in a diversified stock market fund and 20% of your assets in a diversified bond fund, over the course of a year, those allocations may end up at 83% and 17%.

To address that, you might either sell shares in the stock fund and buy shares in the bond fund in order to return to the original 80/20 mix, or adjust your allocations going forward to hit the target in the next year.

#7 Diversify

In addition to employer matching, diversification is considered one of the few “free lunches” for investors. By diversifying your investments, you can help to lower the risk of your assets tanking while still being exposed to the gains of the market.

difference between stocks and bonds.)

Within stocks, diversification can mean investing in US stocks, international stocks, big companies, and small companies. But rather than, for example, owning shares in one big American company, one big Japanese company, a multi billion-dollar company, and a smaller company, it might make sense instead buy diversified funds in all these categories that are diversified within themselves—thus offering exposure to the whole sector without being at the risk of any given company collapsing.

#8 Beware Early Withdrawals

Perhaps the most important 401(k) tip is to remember that the 401(k) is designed for retirement, with funds withdrawn only after a certain age. The system works by letting you invest income that isn’t taxed until distribution. But if you withdraw from your 401(k) early, much of this advantage disappears.

With few exceptions, the IRS imposes a 10% tax penalty on withdrawals made before age 59½. That 10% tax is on top of any regular income taxes a plan holder would pay on 401(k) withdrawals. While withdrawals are sometimes unavoidable, the steep cost of withdrawing funds should be a strong reason not to, as it wipes away much of the gains that can come from 401(k) investing.

If you would like to buy a car or a house, or pay off debt, there are other options to explore. First consider pulling money from any accounts that don’t have an early withdrawal penalty, such as a Roth IRA (contributions can be withdrawn penalty-free as long as they’ve met the 5-taxable-year rule) or a brokerage account.

The Takeaway

If you have a 401(k) through your employer, you may want to consider taking advantage of it. Not only might you have a company match, but automatic contributions taken directly from your paycheck and deposited into your 401(k) may keep you from forgetting to contribute.

That said, a 401(k) is not the only option for saving and investing money for the long-term. One such option is a Roth IRA. While there are income limitations to who can use a Roth IRA, these accounts also tend to have a bit more flexibility when withdrawing funds than 401(k) plans. (If you don’t qualify for a Roth IRA, ask your tax professional for additional guidance.)

Another option is to open an investment account that is not tied to an employer-sponsored retirement plan. Sometimes called a brokerage or after-tax account, these accounts don’t have the special tax treatment of retirement-specific accounts, but can still be viable ways to save money for people who have maxed out their 401(k) contributions or are looking for an alternative way to invest.

Find out how SoFi Invest® can help you start saving for your future.


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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

What to Know About a Market Sell-Off

Often, the word sell-off is used in conjunction with market volatility, but you may wonder what, exactly it means, especially when it comes to your money. A market sell-off occurs when a large pool of investors decide to sell stocks. When they do this, stock prices fall as a result.

A market sell-off may be due to external events, such as when regional lockdowns were announced following the escalation of the COVID-19 crisis. But sometimes sell-offs can be triggered by earnings reports that failed expectations, technological disruption, or internal shifts within an industry.

During a market sell-off, stock prices tumble. That stock volatility might lead other investors to wonder whether they should sell as well, whether they should hold their current investments, or whether they should buy while stock prices are low.

There is no “right” answer for whether to buy, hold, or sell a stock during a market sell-off, but understanding the nature of a sell-off—as well as the purpose of your investments—can help investors decide on the right strategy for them.

Understanding Bull Market vs. Bear Market

Understanding the overall market environment (as well as common stock market terms) can help investors understand how sell-offs exist within the market.

It’s not uncommon to see references to a bull market and a bear market. A bull market is when the stock market is showing gains. There are no specific levels of increase that indicates a bull market, but the phrase is commonly used when stocks are “charging ahead”—and is generally considered a good thing. A bear market, on the other hand, is typically used to describe situations when major indexes fall 20% or more of their recent peak, and remain there for at least two months.

There are also “corrections.” This is when the market falls 10% or more from a recent stock market high. Corrections are called such because historically, they “correct” prices to a longer-term trend, rather than hold them at a high that’s not sustainable. Sometimes, corrections turn into a bear market. Other times, corrections reach a low and then begin to climb back to a more level price, avoiding a bear market.

What To Do During a Market Sell-Off

A sell-off can make news, and can make investors edgy. After all, investors don’t want to lose money and some investors fear that a sell-off portends more bad news, like a bear market.

portfolio diversification strategy may be different between investors, but the underlying anchor of any diversification strategy is, “don’t put all your eggs in one basket.” Since it’s not unusual for a sell-off to affect only parts of the market, a diverse portfolio may be able to better ride out a market sell-off than a portfolio that is particularly weighted toward one sector, industry, or exchange.

online ETFs that can help you build a more diverse investment portfolio to hedge against ups and downs.

Protecting a Portfolio From Sell-Offs

In addition to building a portfolio that’s less vulnerable to market volatility, investors have several options to further protect their portfolio. These preventative investment measures can remove emotion during a market dip or sell-off, so that an investor knows that there are stopgaps and safeguards for their portfolio.

Stop Losses

This is an automatic trade order that investors can set up so that shares of a certain stock are automatically traded or sold when they hit a price predetermined by an investor. This can protect an investment for an individual stock or for an overall market drop. There are several stop loss order variants, including a hard stop (the trade will execute when the stock reaches a set price) and a trailing stop (the price to trade changes as the price of the stock increases).

Put Options

Put options are another type of order that allow investors to sell at a set price during a certain time frame; “holding” the price if the stock drops lower and allowing the investor to sell at the higher price even if the stock drops further.

Limit Orders

Investors can also set limit orders. These allow an investor to choose the price and number of shares they wish to buy of a certain stock. The trade will only execute if the stock hits the set price. This allows investors freedom from tracking numbers as price points shift.

The Takeaway

A market sell-off is triggered when a large group of investors sell their stocks at once, causing stock prices to drop. A sell-off can be caused by world events, industry changes, or even corporate news.

There is no one smart way to react to a sell-off. Different investors will gravitate toward different strategies. But by researching companies and setting up a portfolio based on risk tolerance, an investor can feel confident that their portfolio can withstand market volatility.

Digital investing tools can help investors keep track of stocks. One such online investing platform is SoFi Invest®. SoFi lets users buy and trade stocks in an easy-to-use app, as well as access professional research, daily business news, and actionable market insights. Investors can also build a portfolio through automated investing, buying pre-selected groups of stocks curated by investment professionals.

Find out how SoFi can help you build and reach for 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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

SOIN20256

Source: sofi.com