8 Steps to Buying a Vacation Home

If you’re like many Americans, you dream of having a beach house, a desert escape, or a mountain hideaway. Perhaps you’re tired of staying at hotels and want the comforts of home at your fingertips.

You’re ready to make this dream a reality. Before you do, consider these steps.

How to Buy a Vacation Home

1. Choose a Home That Fits Your Needs

As you begin your search for a vacation home, carefully consider your goals and needs. Start with the location. Do you prefer an urban or rural area? Lots of property or a townhouse with just a small yard to care for?

Consider what amenities are important to be close to. Where is the nearest grocery store? Is a hospital accessible?

Consider your goals for the property. Is this a place that only you and your family will use? Do you plan to rent it out from time to time? Or maybe you plan to be there only a couple of weeks out of the year, using it as a rental property the rest of the time.

The answers to these questions will have a cascade effect on the other factors you’ll need to consider, from financing to taxes and other costs.

2. Figure Out Financing

Next, consider what kind of mortgage works best for you, if you’re not paying cash. You may want to engage a mortgage broker or direct lender to help with this process.

If you have a primary residence, you may be in the market for a second mortgage. The key question: Are you purchasing a second home or an investment property?

Second home. A second home is one that you, family members, or friends plan to live in for a certain period of time every year and not rent it out. Second-home loans have the same rates as primary residences. The down payment could be as low as 10%, though 20% is typical.

Investment property. If you plan on using your vacation home to generate rental income, expect a down payment of 25% or 30% and a higher rate for a non-owner- occupied loan. If you need the rental income in order to qualify for the additional home purchase, you may need to identify a renter and have a lease. A lender still may only consider a percentage of the rental income toward your qualifying income.

Some people may choose to tap equity in their primary home to buy the vacation home. One popular option is a cash-out refinance, in which you borrow more than you owe on your primary home and take the extra money as cash.

3. Consider Costs

While you consider the goals you’re hoping to accomplish by acquiring a vacation home, try to avoid home buying mistakes.

A mortgage lender can delineate the down payment, monthly mortgage payment, and closing costs. But remember that there are other costs to consider, including maintenance of the home and landscape, utilities, furnishings, insurance, property taxes, and travel to and from the home.

If you’re planning on renting out the house, determine frequency and expected rental income. Be prepared to take a financial hit if you are unable to rent the property out as much as you planned. For a full picture of cost, check out our home affordability calculator.

4. Learn About Taxes

Taxes will be an ongoing consideration if you buy a vacation home.

A second home qualifies for mortgage interest and property tax deductions as long as the home is for personal use. And if you rent out the home for 14 or fewer days during the year, you can pocket the rental income tax-free.

If you rent out the home for more than 14 days, you must report all rental income to the IRS. You also can deduct rental expenses.

The mortgage interest deduction is available on total mortgages up to $750,000. If you already have a mortgage equal to the amount you on primary residence, your second home will not qualify.

The bottom line: Tax rules vary greatly, depending on personal or rental use.

5. Research Alternatives

There are a number of options to owning a vacation home. For example, you may consider buying a home with friends or family members, or purchasing a timeshare. But before you pursue an option, carefully weigh the pros and cons.

If you’re considering purchasing a home with other people, beware the potential challenges. Owning a home together requires a lot of compromise and cooperation.

You also must decide what will happen if one party is having trouble paying the mortgage. Are the others willing to cover it?

In addition to second home and investment properties, you may be tempted by timeshares, vacation clubs, fractional ownership, and condo hotels. Be aware that it may be hard to resell these, and the property may not retain its value over time.

6. Make It Easy to Rent

If you do decide to use your vacation home as a rental property, you have to take other people’s concerns and desires into account. Be sure to consider the factors that will make it easy to rent. A home near tourist hot spots, amenities, and a beach or lake may be more desirable.

Consider, too, factors that will make the house less desirable. Is there planned construction nearby that will make it unpleasant to stay at the house?

How far the house is from your main residence takes on increased significance when you’re a rental property owner. Will you have to engage a property manager to maintain the house and address renters’ concerns? Doing so will increase your costs.

7. Pay Attention to Local Rules

Local laws or homeowners association rules may limit who you can rent to and when.

For example, a homeowners association might limit how often you can rent your vacation home, whether renters can have pets, where they can park, and how much noise they can make.

Be aware that these rules can be put in place after you’ve purchased your vacation home.

8. Tap Local Expertise

It’s a good idea to enlist the help of local real estate agents and lenders.

Vacation homes tend to exist in specialized markets, and these experts can help you navigate local taxes, transaction fees, zoning, and rental ordinances. They can also help you determine the best time to buy a house in the area you’re interested in.

Because they are familiar with the local market and comparable properties, they are also likely to be more comfortable with appraisals, especially in low-population areas where there may be fewer houses to compare.

The Takeaway

Buying a vacation home can be a ticket to relaxation or a rough trip. It’s imperative to know the rules governing a second home vs. a rental property, how to finance a vacation house, tax considerations, and more.

Ready to buy? SoFi offers mortgages for second homes and investment properties, including single-family homes, two-unit buildings, condos, and planned unit developments.

SoFi also offers a cash-out refinance, all at competitive rates.

Got two minutes to spare? That’s how long it takes to check your rate for a mortgage with SoFi.



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

What is a 51% Attack?

A 51% attack is when a single cryptocurrency miner or group of miners gains control of more than 50% of a network’s blockchain. Such attacks are one of the most significant threats for people who use and buy cryptocurrencies.

The 51% attack scenario is rare, largely because of the logistics, hardware and costs required to carry one out. But a successful block attack could have far-reaching consequences for the cryptocurrency market and those who invest in it.

Cryptocurrency investing can be potentially lucrative but it involves a higher degree of risk compared with stock or bond investing. If an investor is considering adding digital currencies to their portfolio, it’s important to understand the implications of a 51% attack.

Background on 51% Attacks

A 51% attack is an attack on a blockchain, which is a type of digital database in ledger form. With blockchain technology, information is collected together in groups or blocks and linked together to create a chain of data. In cryptocurrency trading, blockchain is used to record approved transfers of digital currencies and the mining of crypto coins or tokens.

With Bitcoin for example, “miners” can attempt to add blocks to the chain by solving mathematical problems through the use of a mining machine. These machines are essentially a network of computers. If miners succeed in adding a block to the chain, they receive Bitcoins in return.

The speed at which all the mining machines within the network operate is the Bitcoin hashrate. A good hashrate can help gauge the health of the network.

A 51% attack occurs when one or more miners takes control of more than 50% of a network’s mining power, computing power or hashrate. If a 51 percent attack is successful, the miners responsible essentially control the network and certain transactions that occur within it.

How a 51% Attack Works

When a cryptocurrency transaction takes place, whether it involves Bitcoin or another digital currency, newly mined blocks must be validated by a consensus of nodes or computers attached to the network. Once this validation occurs, the block can be added to the chain.

The blockchain contains a record of all transactions that anyone can view at any time. This system of record keeping is decentralized, meaning no single person or entity has control over it. Different nodes or computer systems work together to mine so the hashrate for a particular network is also decentralized.

When a majority of the hashrate is controlled by one or more miners in a 51% attack, however, the cryptocurrency network is disrupted. Those responsible for a 51% attack would then be able to:

•  Exclude new transactions from being recorded
•  Modify the ordering of transactions
•  Prevent transactions from being validated or confirmed
•  Block other miners from mining coins or tokens within the network
•  Reverse transactions to double-spend coins

All of these side effects of a block attack can be problematic for cryptocurrency investors and those who accept digital currencies as a form of payment.

For example, a double-spend scenario would allow someone to pay for something using cryptocurrency, then reverse the transaction after the fact. They’d effectively be able to keep whatever they purchased along with the cryptocurrency used in the transaction, bilking the seller.

What a 51% Attack Means for Cryptocurrency Investors

A 51% attack isn’t a common occurrence but it’s not something that can be brushed off. For cryptocurrency investors, the biggest risk associated with a 51% attack may be the devaluation of a particular digital currency.

If a cryptocurrency is subject to frequent block attacks, that could cause investors to lose confidence in the market. Such an event could cause the price of the cryptocurrency to collapse.

The good news is that there are limitations to what a miner who stages a 51% attack can do. For example, someone carrying out a block attack wouldn’t be able to:

•  Reverse transactions made by other people
•  Alter the number of coins or tokens generated by a block
•  Create new coins or tokens from nothing
•  Transact with coins or tokens that don’t belong to them

Investors may be able to insulate themselves against the possibility of a 51% percent attack by investing in larger, more established cryptocurrency networks versus smaller ones. The larger a blockchain grows, the more difficult it becomes for a rogue miners to carry out an attack on it. Smaller networks, on the other hand, may be more vulnerable to a block attack.

Is Cryptocurrency Investing a Good Idea?

Cryptocurrencies can help boost portfolio diversification, but there are certain risks to be aware of. Current cryptocurrency rules and regulations offer some protections to investors, but on the whole, the market is far less regulated than stocks, mutual funds and other securities. Here are some potential upsides and downsides of investing in digital currencies.

Pros of Cryptocurrency Investing

•  Bigger rewards. Compared with stocks and other securities, cryptocurrency investing could yield much higher returns. In 2020, for example, Bitcoin surged 159% higher.
•  Liquidity. Liquidity measures how easily an asset can be converted to cash or its equivalent. Popular cryptocurrencies like bitcoin are more liquid assets, which may appeal to investors focused on short-term trading strategies.
•  Transparency. Blockchain networks offer virtually complete transparency to investors, as new transactions are on record for everyone to see. That can make cryptocurrency a much more straightforward investment compared with more opaque investments like a hedge fund or a real estate investment trust (REIT).

Cons of Cryptocurrency Investing

•  Volatility. Cryptocurrencies can be extremely volatile, with wide fluctuations in price movements. That volatility could put an investor at greater risk of losing money on digital currency investments.
•  Difficult to understand. Learning the ins and outs of cryptocurrency trading, blockchain technology, and digital coin mining can be more complicated than learning how a stock, ETF or index fund works. That could lessen its appeal for a newer investor who’s just learning the market.
•  Not hands-off. If an investor is leaning towards a passive investment strategy, cryptocurrency may not be the best fit. Trading cryptocurrencies generally focuses on the short-term, making it more suited for active traders.

If an investor is still on the fence, they can consider taking SoFi’s crypto quiz to determine how much they already know about this market.

The Takeaway

Cryptocurrency investing may appeal to an investor if they’re comfortable taking more risk to pursue higher returns. If an investor is new to cryptocurrency trading, the prospect of a 51% attack might seem intimidating. Understanding how they work and the likelihood of one occurring can help them feel more confident.

If an investor is ready to start trading Bitcoin, Ethereum, and Litecoin, SoFi Invest can help. Members can trade cryptocurrencies 24/7, starting with as little as $10. The SoFi app allows users to manage their account from anywhere.


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.

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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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What Is Share Lending?

Share lending is the business of investment firms loaning out shares to borrowers as a way to collect additional revenue on stocks that otherwise would have sat untraded in their portfolios. Meanwhile, the borrowers of the shares are often short sellers, who give collateral in the form of cash or other securities to the lenders.

Lenders tend to be pension funds, mutual funds, sovereign wealth funds and exchange-traded fund (ETF) providers, since these types of firms tend to be long-term holders of equities. Brokerages can also practice securities lending with shares in retail investors’ brokerage accounts. Share lending helps such firms keep management fees down for their investors.

Also known as securities lending, the practice can extend beyond equities to bonds and commodities. Securities lending has become more popular in recent years as price wars drove down management fees to near zero and investment firms sought other sources of revenue. Revenue worldwide from securities lending totaled $7.66 billion in 2020 , with an additional $2.87 billion in broker-to-broker activity, according to financial data firm DataLend.

Share lending is useful to investors who are shorting a stock, because they have to borrow shares in order to put on their bearish positions. Critics argue that the practice comes at the expense of fund investors, since investment firms forgo their voting rights when they loan out shares. They might also try to own stocks that are easier to rent out. Other concerns include a lack of transparency and an increase in counterparty risk.

How Securities Lending Works

Here’s a closer look at how share lending works:

1. Institutional investors use in-house or third-party agents to match their shares with borrowers. Such agents receive a cut of the fee generated by the loan.
2. The fee is agreed upon in advance and typically tied to how much demand there is for the lent-out security.
3. The institutional investor or lender often reinvests the collateral in order to collect additional interest or income while their shares are out on loan.
4. Borrowers tend to be other banks, hedge funds, or broker-dealers, as well as sometimes other lending agents. When the borrower is done using the shares, they return them back to the lender.
5. If the collateral posted was in the form of cash, a proportion of the revenue earned from reinvesting is sometimes given back to the borrower.

For retail investors versus institutional ones, they should learn whether their brokerage offers securities lending or share lending programs. It’s important for individual investors to know that for dividend stocks, they would get some form of payment from the borrower, rather than the dividend itself. This payment may be taxed at a higher rate than a dividend payout.

Share Lending and Short Selling

In order to short a stock, investors first borrow shares. They then sell these shares to another investor or trader, with the hope that when the stock price falls, the short seller can buy them back and pocket the difference before returning the loaned shares.

In share lending, a share can only be lent out once, but when the borrower is a short seller, they can sell it, and the new buyer can lend it again. This is why the short float–the percentage of the share float that is shorted–can rise above 100% in a stock.

The fee generated by renting out shares depends on their availability. A small number of stocks tend to account for a large proportion of revenue in securities lending.

For instance, data from DataLend show that in 2020, of the $7.66 billion generated in securities lending revenue, $482 million was generated by lending out just five stocks.

Criticism of Securities Lending

In December 2019, Japan’s Government Pension Investment Fund announced that it will halt stock lending, saying the practice is not in line with its goals as a long-term investor. The world’s largest pension fund cited a lack of transparency on who is the ultimate borrower of the loaned securities, as well as why they were borrowing.

This became a bigger concern for investors after the “cum-ex” scandal in Germany, where borrowed shares were used in a tax evasion scandal.

Another one of the biggest criticisms of share lending is that voting rights of the actual stock transfers to the borrower. This challenges the traditional model where institutional investors vote and push for change in companies in order to maximize shareholder value for their investors. Money managers can recall shares in order to cast a vote in an upcoming shareholder meeting. But there are concerns they don’t and it’s unclear how often they do.

Another concern has been that share lending programs incentivize money managers to own stocks that are popular to borrow. A 2017 academic paper updated in November 2020 found that mutual funds that practice securities lending tend to overweight high-fee stocks and then underperform versus funds that do not rent out shares.

Potential Risks of Share Lending

Retail investors should take note that securities that have been loaned are not protected by the Securities Investor Protection Corporation (SIPC ). The SIPC however does protect the cash collateral received for the loaned securities for up to $250,000.

Another concern is the increase in counterparty risk. Let’s say for example a short seller’s wager goes sour. If the shorted stock rallies enough, the short seller could default and there’s a risk that the collateral posted to the lender isn’t enough to cover the cost of the shares on loan.

Separately, the lender, whether they’re a pension or an ETF provider, typically reinvests the cash collateral in order to earn additional interest. Bad bets could cause the value of the investment to drop. During the 2008 financial crisis, some funds lost money from reinvesting the collateral in risky assets.

The Takeaway

Share lending or securities lending is a small but reliable source of revenue for institutional investors and brokerage firms, who get to rent out shares that otherwise would have sat idly in portfolios. The practice has ramped up in recent years as management and brokerage fees have shrunk dramatically due to competition and the popularity of index investing.

Proponents argue that securities lending helps pay for the cost of running money management funds and brokerage platforms, which in turn allows investors to benefit from lower fees.

Critics argue that a loss of voting rights and a lack of transparency are problematic, as well as the risk that share lending can distort mutual fund portfolios to overweight stocks that are popular to borrow, hence more likely to generate revenue.

SoFi Invest® makes money from interest earned on uninvested cash in accounts and lending out securities, as well as a small amount from payment for order flow. Users of the platform can pick between an Active Investing or Automated Investing account, depending on how hands-on or hands-off they want to be. Members also have access to a financial planner who can help them make better informed investment decisions.

Open a SoFi Invest account 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.

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.
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.

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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.

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Source: sofi.com

What Investors Should Know About Spread

When trading stocks, there are several market terms that are helpful to understand, such as portfolio, dividend, and volatility. Another key term to know is spread.

In simple terms, a spread represents the difference between any two financial metrics. The type of spread depends on the type of security that’s being traded. For example, when trading bonds, the spread can refer to a difference in yields between bonds of varying maturity lengths or quality.

But there are many differences between bonds vs. stocks—and spread is one of them. With stocks, spread refers to differences in price. Specifically, it measures the gap between the bid price and the ask price. Understanding what is spread and how it works can help you more effectively shape your investment strategy.

What Is Spread?

buying a home. As a home buyer, you may have a set price that you’re willing to pay for a property, based on what you can afford and what you’ve been pre-approved for by your mortgage lender.

You search for homes and eventually find one that has everything on your wishlist. When you check the listing price, you see that the seller has it priced $10,000 above your budget. In terms of spread, the maximum amount you’re willing to offer for the home represents the bid price, while the seller’s listing price represents the ask.

What Does Spread Mean?

Aside from stock spread, spread can have a variety of applications and meanings in the financial world.

As mentioned earlier, bond spread typically refers to differences in yield. But if you’re trading futures, the spread can measure the gap between buy and sell positions for a particular commodity. With options trading, it can refer to differences in strike prices when placing call or put options.

Spread can also be used in foreign currency markets or forex (foreign exchange market) trades to represent the difference between the costs for traders and the profits realized by dealers.

With lending, spread is tied to a difference in interest rates. Specifically, it means the difference between a benchmark rate, such as the prime rate, and the rate that’s actually charged to a borrower. So for example, if you’re getting a mortgage there might be a 2% spread, meaning your rate is 2% higher than the benchmark rate.

Bid-Ask Price and Stocks Spread

If you trade stocks online, it’s important to understand how the bid-ask price spread works and how it can affect your investment outcomes. Since spread can help gauge supply and demand for a particular stock, investors can use that information to make informed decisions about trades and increase the odds of getting the best possible price.

Limit orders. This is an order to buy or sell a security at a certain price or better.
•  Stop orders. A stop order, also called a stop-loss order, is an order to buy or sell a security once it hits a certain price. This is called the stop price and once that price is reached, the order is executed.
•  Buy stop orders. Buy stop orders are used to execute buy orders only when the market reaches a certain stop price.
•  Sell stop orders. A sell stop order is the opposite of a buy stop order. Sell stop orders are executed when the stop price falls below the current market price of a security.

Stop orders can help with limiting losses in your investment portfolio if you’re trading based on bid-ask price spreads. Knowing how to coordinate various types of orders together with stock spreads can help with getting the best possible price as you make trades.

The Takeaway

The more investing terms an investor is familiar with, the better able they’ll be to invest with confidence. Spread is a term that means different things in different situations, but when it comes to stocks, spread is the difference between the bid price and ask price of a given stock. Being able to assess what a spread might mean can help inform individual trading decisions.

As you learn more about stocks, including what is spread and how it works, you can use that knowledge to create a portfolio that reflects your financial needs and goals.

SoFi Invest® makes it easy to get started with stock trading and investing. Members can choose which stocks to buy or sell, based on their investment objectives and risk tolerance, and purchase shares in some of the market’s biggest companies through fractional share investing with Stock Bits.

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.

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.

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

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