Although what lies ahead in the world of real estate and mortgage services in 2024 remains a bit uncertain, it’s now crystal clear that, beyond the already-tired suggestion that we “survive until ’25,” quite a few businesses will be seeking to find additional sources of revenue.
One potential stream that quickly comes to mind is the potential of capturing title and closing business. Accordingly, we’ve already seen any number of builders, mortgage lenders and real estate firms building new affiliated business arrangements (ABAs) or entering into partnerships that put them into the game for settlement services revenue.
That activity will only increase as we move through the year. Here’s why.
The full impact of the Burnett verdict has yet to be seen
The final disposition of the Burnett vs. NAR decision likely won’t be seen for years as the result works its way through the courts. For the most part, many brokerages and real estate agents on the buyer’s side of the transaction have continued on with a “business as usual” approach until we have certainty as to the true impact. And yet, in combination with what remains an uncertain market, more and more teams and brokerages will likely have the incentive to increase revenue and remove the uncertainty from the buying side well before they have to.
It’s entirely possible we’ll see the continuation of the trend towards team selling in the wake of Burnett. It’s not hard to imagine an approach where the listing agents take the lead on the front end of a transaction while a team of buyer agents works with them in the background. Such an approach would likely tend toward a transactional, brokerage-focused revenue model.
In these cases, it would be logical for teams and brokerages not only to seek out additional revenue, but to retain greater control over a transaction from start to finish, which affiliated title operations can bring. In building such arrangements, the real estate firm would have greater control over the experience, hopefully speeding the process from start to finish and delivering a smoother overall customer experience. It won’t be the first time this industry loudly extols the virtues of one-stop shopping.
Here’s who will be seeking to build and grow ABAs…and who shouldn’t
Naturally, until we see a significant upturn in overall origination volume, it won’t just be brokerages and teams seeking to build ABAs or enter into title partnerships. Lenders and builders have also shown a heightened interest at a time when construction materials remain costly, labor costs and pay rates are elevated and interest rates remain high.
At the same time, a more controlled closing experience could help address closing delays arising from the lender’s side or the construction process. While it’s easy for a third-party closing firm to point fingers and shift the blame in such instances, an affiliated operation is “part of the team.” No one will be thrown under the bus in such situations. Accordingly, there are multiple compelling reasons for lenders and builders to consider an affiliated title operation.
Far too often, however, a non-title business will focus on the potential for new revenue without fully considering the cost and the burden that comes with building any new business.
To slightly oversimplify it, a true affiliated arrangement likely won’t pass regulatory scrutiny if the arrangement isn’t being run like a viable business, with any and all partners not fully engaged. Businesses hoping to simply refer their customers to an affiliated arrangement in exchange for a cut of the settlement fees have learned this the hard way.
So when should a builder, real estate firm or lender consider other alternatives to an ABA, such as partnering with an existing title agency? For starters, if there’s no long term strategy (IPO, build to sell in five years) in place, the arrangement is off to a bad start. “Let’s see how we do” is not a strategy for starting most businesses and it won’t work for an ABA, either.
Other offshoots of this philosophy (or lack thereof) include the parent business not having some way of actively being involved in the day-to-day operation of the ABA. Or perhaps the venture is woefully undercapitalized because of mistakes in building out a pro forma and business strategy.
Do you have a plan for how the affiliated operation will capture new business — and not just from your own operation? For many reasons, this can get overlooked as well, and it’s seen often in affiliated arrangements that fail quickly.
Finally, geography — often the impetus for building an ABA or entering a partnership with a title agency — is a major factor in planning an affiliated title operation. Where will the business come from? State by state and sometimes, even county by county, the new operation will have to undergo the same licensing (and compliance processes) any other new title business would. This takes time, expertise and funding. You might even be required to have a brick-and-mortar operation in that state or county.
If you’re not planning to invest sufficiently in such requirements, chances are that some other form of true partnership with a title or escrow firm might be a better alternative.
When is an affiliated arrangement the best option for real estate firms, lenders and builders?
For those considering the process of building an ABA, the answer should be “yes” to each of the following questions if an ABA is truly right for you.
Are you planning and willing to treat the ABA like a new business with a long term strategy and exit plan?
Are you truly aware, either from your own experience or with the help of an experienced, successful title professional who has actually built a successful title operation in the real world, of all of the expenses that come with a start-up title operation?
Do you have a viable sales model, beyond expecting all new business from the parent company of the ABA?
Have you arranged for sufficient capitalization?
Finally, do you have qualified people and effective, sustainable systems in place?
Building an affiliated title operation can be a fantastic means of capturing new revenue, which is why ABA activity generally spikes during slower market conditions. But it’s critical to understand that it’s anything but simply agreeing to send the new operation most or all of your clientele in return for a percentage of the fees. You don’t have to be an attorney to know that’s the biggest no-no RESPA provides.
Building a truly successful ABA requires strategy, experience, planning and above all, commitment. While many real estate brokerages and professionals will very likely look to ABAs in the uncertain aftermath of the Burnett decision, it’s important they realize that there’s much more to it than that.
Aaron Davis is the CEO of AMD Enterprises, a conglomerate of eClosing, technology, settlement services and consulting services which includes Florida Agency Network, Closingsuite.com, Premier Data Services and Network Transaction Solutions.
With four commission lawsuits in play, Illinois currently holds the title for the most commission lawsuits in one state. In addition to the long running Moehrl commission lawsuit, as well as the Batton 1 and Batton 2 suits, the Prairie State is now home to the Tuccori suit, filed in early December 2023 by James Tuccori against @properties.
The suit was originally filed in the Circuit Court of Cook County Illinois, but it was moved to the U.S. District Court for the Northern District of Illinois Eastern Division last Friday.
Like the other copycat commission lawsuits, the plaintiff James Tuccori, an Illinois resident who purchased a home listed on the local MLS in 2018 with the help of an @properties agent, is accusing real estate industry players of colluding to artificially inflate real estate agent commissions. The suit takes aim at the National Association of Realtor’s Participation Rule which requires listing brokers to make a blanket offer of compensation to the buyer’s broker in order to list a property on a NAR affiliated MLS.
“These anti-competitive rules permit Defendant and other NAR members to sustain buyer-agent fees at artificially high levels which would not exist in a competitive marketplace,” the complaint reads. “Defendant and the members of NAR further protect and promote their conspiracy by exerting control over and manipulating the MLSs, which constitute the gateway to homebuying and selling.”
“There is no pro-competitive benefit to the conspiracy,” the complaint adds. “Defendant and its coconspirators have effectively maintained and significantly raised the financial costs of buyerbroker commissions, despite the diminishing role of such buyer-brokers due to the emergence of third-party listing websites.”
As with all of the other commission lawsuits, Tuccori’s suit is seeking class action status. However, the suit is seeking both national and Illinois class action status for all persons who purchased a home listed on a NAR MLS with a buyer’s agent and or seller-agent employed or affiliated with @properties or any of its franchises, subsidiaries, or agencies between March 17, 2000, and the present.
The plaintiff is demanding a jury trial, as well as damages and a permanent injunction that prevents the defendants from continuing on with these practices.
In an emailed statement, a spokesperson for @properties Christie’s International Real Estate, the top brokerage in Chicago, wrote that the copycat suit was in response to the Missouri jury’s verdict in the Sitzer/Burnett suit.
“The Kansas City case was premised on those other brokerages controlling NAR by having their executives serve on its board of directors and executive committee, which allegedly created, implemented, and enforced the NAR rules at issue. In contrast, the Chicago complaint makes no specific allegation that @properties was or is involved in any such activities,” the spokesperson wrote. “In fact, while we are members of NAR, no @properties manager or executive has ever served in any role at NAR with any rule-making authority. This applies to Mabel Guzman, a former @properties agent who is mentioned in the complaint, but who was never an employee or manager with @properites and was never directed by @properties’ management in her volunteer role with NAR. We will move to vigorously defend against this complaint and believe that it will be resolved in our favor.”
Guzman moved to a Coldwell Banker affiliate in Chicago in 2020 and remains an active member of NAR. According to her official biography, she served as the NAR 2021 vice chair for the insurance committee and she also chaired the business insurance work group. In 2020, she served as vice president of association affairs at NAR.
Investing is more than just saving for the future. It’s about creating a wealth-building strategy to truly make your nest egg grow. That’s because investing typically earns you a higher interest rate than if you put all of your money in a traditional savings account.
While historically low rates are great for when you need to borrow money, they’re pretty dismal when you’re ready to start saving. Investing does come with a higher risk, but you can generally mitigate it with diversified holdings and long-term positions. Plus, it’s easier than ever.
You’re not limited to working with an expensive brokerage or saving a huge amount to reach a minimum investment threshold. Now you can even invest by using an app on your smartphone with the leftover change from your checking account.
Ready to learn how to invest? We’ve got you covered with everything you need to know.
What is investing, and why is it important?
Investing is the act of putting money into financial instruments, such as stocks, bonds, or mutual funds, with the expectation of earning a profit. It allows individuals to save and grow their wealth over time, and can provide a financial cushion for the future, such as during retirement.
The Benefits of Investing
The reason money grows so aggressively through investing is that it’s powered by compound returns. Investments are typically meant for a long-term strategy, rather than taking out money every few months.
When you leave your money untouched in an investment vehicle that offers greater returns than a savings account, your gains continue to compound.
No matter what age you are, it’s a good time to start investing. If you’re younger, you can create a strong foundation to truly accumulate wealth over the coming years.
Even if you’re older, you may be able to catch up faster because of those higher returns. Don’t worry about getting started — even if you can only contribute a small amount each month, you’ll set up the infrastructure and challenge yourself to contribute more as you begin to earn more.
How to Reduce Your Risks in Investing
When investing long-term, you can’t think about your everyday gains and losses; instead, think about how your allocations are performing in the long run. You do want to review your investment choices as you reach different stages in your life; in particular, becoming less aggressive as you get older.
In fact, most investors don’t partake in volatile day trading. They spread their money over diversified investment types to help reduce risk and maximize returns over time.
There will always be economic cycles with highs and lows. But even downturns can be mitigated in your investment portfolio by spacing out your money over different product categories as well as different economic sectors. This can go a long way in protecting your money over time.
If you do want to try out some riskier investments, make sure you view that money as discretionary risk capital, meaning your livelihood and well-being won’t be impacted if you lose it all.
How to Invest Your Money
Diversification is essential, as is setting reminders to review the performance of your picks, such as a quarterly review. It also helps you adjust your asset allocation based on your own financial goals. Are you trying to retire earlier than you initially planned? Are you able to contribute more each month?
With these strategies in mind, here is a comprehensive review of different investment vehicles you can take advantage of to accumulate wealth over time.
Retirement Accounts
Retirement accounts are probably the most common and accessible types of investment accounts. You may be able to open a retirement account through your employer or open one on your own. Each type comes with a different tax treatment, so review the details carefully.
Traditional IRA
A traditional IRA is a tax-advantaged account that allows you to deduct your contributions each year. Once you start making retirement withdrawals, you’ll pay the IRS based on the tax bracket you’re in at that time.
They do have annual contribution limits. For 2024, it’s $7,000 unless you’re 50 years or older, in which case you can contribute up to $8,000.
If you want to take a distribution before you reach the age of 59 ½, you’ll have to pay a 10% penalty on top of your taxes. There are a few exceptions to the penalty, such as when you use the funds for a down payment on a house or qualified college expenses.
Another plus is that there is no income limit for qualifying, unlike other IRA options.
Roth IRA
A Roth IRA is another tax-advantaged retirement account. However, it comes with a few key differences compared to a traditional IRA. You don’t get a tax deduction when you make your contributions, but you do get to deduct your withdrawals once you reach retirement age.
If you think you’ll be in a higher tax bracket once you hit retirement, this could be a useful tool to save on your taxes later in life. For Roth IRAs, the contribution limit is between $7,000 and $8,000, depending on your age.
However, there’s another qualification you’ll have to meet: the income limit.
The more you earn, the less you’re able to contribute. Your contribution limit is reduced when you earn more than $230,000 for those married filing jointly and more than $146,000 for those filing single or as head of household.
Rollover IRA
A rollover IRA is one way to transfer an existing 401(k) from your employer once you decide to leave the company. Sometimes an employer lets you leave it there or transfer your funds to a retirement plan at your new place of work. Whether those two scenarios don’t apply to you or you prefer the flexibility of an IRA, a rollover may be a suitable option for you.
Both traditional and Roth IRAs generally allow you to bring in transfer retirement accounts. Just be sure to check your eligibility for either type, as well as any relevant fees you may incur during the transfer process.
SEP IRA
This type of IRA is designed specifically for self-employed individuals. While traditional and Roth IRAs are often used to supplement retirement savings accrued through employer plans, a SEP IRA allows for higher contribution limits when you work for yourself. The contribution is the lesser of either 25% of your income or $69,000.
Its tax treatment is the same as traditional IRAs. If you have employees, however, you must provide each one with their own SEP IRA and contribute the same salary percentage as you contribute to your own. Still, this can be a strong option to speed up your retirement investments, particularly if you don’t have employees or only have a few.
Stocks
Investing in stocks is typically best for active investors, and ideally, someone who already has experience in the stock market. If you’re just getting started, consider your stock investments as play money rather than something you need to rely on to meet your future financial goals. Because individual stocks are riskier, be sure to diversify the ones you choose to invest in.
Buying and selling stocks can result in hefty commission fees. Consider a buy-and-hold approach to avoid accumulating too many expenses, especially when you’re first getting started.
While you no longer need an established broker to execute trades, you can instead create a brokerage account with one of the larger brokerage firms. Your best bet is to compare fees as well as available research to help you make informed trading decisions.
Mutual Funds
Mutual funds combine your money with other investors to purchase securities for the entire group. The portfolio is professionally overseen by a manager, who then selects different types of stocks, bonds, and other securities on your behalf.
You can gauge the performance of a particular mutual fund by comparing it to its chosen benchmark, such as the S&P 500. If it regularly performs better over the course of a three to five-year period, then it could be a good investment choice.
Mutual funds are a popular choice because you generally don’t need a lot of money to get started. You can often choose one within your retirement account to get around any minimum requirements, or even set up a recurring investment amount.
Plus, mutual funds are extremely diversified, often holding as much as 100 securities in each one. This helps to minimize your risk as well as the amount of time you spend managing your portfolio.
Index Fund
An index fund is a popular type of mutual fund that follows a predetermined investment methodology rather than having a portfolio manager pick the included securities.
For example, you could choose a Dow Jones Industrial Average index fund, which includes 30 powerhouse companies in the U.S. Whiles that’s a large-scale example, different investment firms create their own index funds for investors to conveniently choose from.
Another benefit of investing in an index fund is that transaction costs are often lower, as are their mutual fund expense ratios. Many index funds are also geared toward investors with lower balances. While some firms have high minimum opening balances of $100,000 or more, you can get started with much less when you pick an index fund.
Exchange-Traded Funds (ETFs)
An exchange-traded fund, or ETF, trades the same way a stock does while tracking a certain basket of assets. There are countless types of ETFs to choose from based on your investment goals.
Common options include market, bond, commodity, foreign market, and alternative investment ETFs. They’re bought and sold like stocks throughout the day, but a major difference is that ETFs can issue and redeem their shares at any point.
There are many benefits that go along with an ETF. For starters, you have more control over when you pay your capital gains tax. There are also lower fees, although you’ll still pay brokerage commissions. Finally, while mutual funds can only be settled after the stock market closes for the day, an ETF allows you to trade at any time.
Bonds
Bonds are a good tool to have in your investment portfolio because they are a low-risk option. Different types of bonds include corporate, municipal, and Treasury bonds. Bonds are fixed-income investments, so you know exactly what to expect when those payout dates come throughout the year. Such predictability does come with a few downsides, though.
First, bonds come with a fixed investment period. If you invest in a longer-term bond, then you’re stuck with it until it matures — unless you decide to sell. But there’s a bit of risk involved there, involving the interest.
Bond rates aren’t locked in, so yours could be devalued if the same issuer bumps up the interest rate at a later time. So if new investors get a better interest rate than you did, you’re still locked into your lower rate. In general, bonds generally come with lower growth than other investments, but that’s considered the trade-off for a lower-risk vehicle.
Real Estate
People always need a place to live, so real estate investing can be an attractive option for investors. There are several ways to do this that account for your desired risk tolerance as well as your desired level of involvement.
Investment Properties
If you feel the drive to own property, an investment property is one way to make a real estate investment. Depending on how you choose to manage your property, this can amount to a steady stream of passive income.
Over time, you could also benefit from market appreciation, although that’s not necessarily guaranteed. There are risks involved with investment properties. Unlike investing in a stock or fund, a physical property involves expenses, such as upkeep, marketing, and a management firm if you want a hands-off experience.
You’ll also need some cash to get started, since most investment property loans require at least a 25% down payment. Moreover, the mortgage is considered part of your debt-to-income ratio, which could affect your future financing opportunities.
If you ever want to cash out on your investment, you’ll be subject to the market value of that moment. Plus, it’s a cumbersome, illiquid way to invest money. Still, the returns can be much greater than traditional investments, making investment properties an attractive option to some people.
REITs
If you would like to invest in real estate without the hassle of acting as a landlord, consider a real estate investment trust, or REIT. These are traded on the stock exchange and can also be offered in the form of a mutual fund or ETF.
Returns can increase as property values rise and generally focus on a portfolio of commercial properties. Shareholders also benefit because REITs don’t pay corporate tax, which helps boost returns as well.
You can pick what sector you want to invest in, such as healthcare, residential, hotel, or industrial REITs. Each comes with separate risks that should be weighed thoughtfully. REIT shares can be purchased through a broker, and each one will have its own fee structure to review as well.
Crowdfunding
Real estate crowdfunding is a type of peer-to-peer lending that is growing traction among investors of all levels. New fintech companies are popping up to compete with REITs, claiming better returns. So, what’s the difference between REITs and real estate crowdfunding sites?
The most significant difference is that instead of choosing a portfolio of properties within a certain asset class, you can choose specific commercial properties in which to invest. While individual investors traditionally wouldn’t be able to invest directly in projects like these, crowdfunding lets you enter these markets with a much smaller amount of cash.
One of the benefits is that you can do much more specialized research to determine what property to invest in. The process is much less passive than REITs. On the downside, however, the risk potential could be higher since your money is riding on one single building rather than a diversified portfolio.
See also: How to Build Generational Wealth
Platforms for Investing Your Money
There are many ways to start investing your money. A financial advisor, though charging extra fees, may provide you with much-needed guidance and education, especially if you’re a beginner. But if you prefer a little less hand-holding, you can consider two other options as well.
Online Brokers
Online brokerages give you the convenience of investing online with the added benefit of controlling what you invest in. So, it’s definitely a more hands-on process than the robo-advisor. Like robo-advisors, however, most online brokers don’t have a minimum balance requirement, so they’re still quite accessible to all types of investors.
Instead of paying a percentage of your funds, online brokers usually charge transaction fees for trades, as well as one-off fees. On the plus side, you’re not limited to your choosing certain funds, as you are with a robo-advisor. If you’d like, you can even select individual stocks. Online brokers and robo-advisors cater to two different types of investors, so the best choice depends on your specific goals.
Robo-Advisors
Enlisting the help of a robo-advisor can be helpful for beginning investors or anyone who wishes to utilize a “set it and forget it” mentality for their portfolio.
Robo-advisors don’t use human financial advisors; instead, they rely on computer algorithms to determine your portfolio allocations. Many of them also use tax harvesting strategies to decrease your tax burden at the end of the year.
Service fees are low and generally charged as a percentage of your invested funds. The transparency is excellent for new investors, and you can also benefit from the low minimum balances. Different robo-advisors offer different investment vehicles you can choose from. You can also pick one based on their investing strategy; most, for instance, pick from ETFs and index funds.
Bottom Line
There are a slew of intricacies for building your investment strategy and making your money work for you. Start with a plan that makes sense for your risk tolerance while still leaving room for growth.
You can access countless resources, from free online tutorials to paid financial advisors, to ensure you have a robust investment plan that will generate a passive income strategy to meet your goals.
How to Invest FAQs
What are the different types of investments?
There are many types of investments. The most popular investments include stocks, bonds, mutual funds, exchange-traded funds (ETFs), and real estate. Each type of investment carries its own level of risk and potential return.
What are the risks of investing?
Investing involves risk, including the potential for loss of principal. The value of investments can fluctuate and may be affected by market conditions, economic events, and other factors.
It’s essential to understand the risks associated with any investment and to consider your risk tolerance before making any investment decisions.
How do I choose the best investments for me?
The best investments for you will depend on your financial goals, how much risk you can tolerate, and other personal factors. It can be helpful to consult an investment advisor or do your own research to determine which investments are suitable for you.
It’s also wise to diversify your portfolio, or invest in various assets, to spread risk and potentially maximize returns.
How much money do I need to start investing?
There is no minimum amount required to start investing. In fact, you can get started investing with $500 or less. However, you should first have a sufficient emergency fund in place before investing. Some investments may have minimum investment requirements, such as mutual funds or certain types of brokerage accounts.
What is a brokerage account?
A brokerage account is a type of investment account that allows you to buy and sell assets such as stocks, mutual funds, ETFs, and bonds. When you open a brokerage account, you typically do so with a financial institution, such as a bank, a credit union, or an online brokerage firm.
To open a brokerage account, you will generally need to provide some personal information, such as your name, address, and Social Security number. You will also typically need to make a deposit of money into the account, which you can use to buy investments.
Once you have a brokerage account, you can place orders to buy or sell investments online, over the phone, or through a broker. The brokerage firm will execute the trades on your behalf and will typically charge a commission or fee for the service.
Brokerage accounts offer a convenient way to manage your investments and to buy and sell assets easily and quickly. They also provide a range of tools and resources to help you make informed investment decisions, such as market research, news and analysis, and educational materials.
Can I invest in stocks with just $100?
Yes, it is possible to invest in stocks with a relatively small amount of money, such as $100. Many brokerage firms have no minimum initial deposit requirement and allow you to start investing with whatever amount of money you have available.
How do I diversify my investment portfolio?
Diversification is the process of investing in various assets to spread risk and potentially maximize returns. This can be achieved by investing in different types of assets, such as stocks, bonds, and real estate, or by investing in different sectors or industries within a particular asset class. To maintain a diversified portfolio, review and adjust it periodically.
What is a financial advisor and do I need one?
A financial advisor is a professional who provides advice on financial matters, such as investing and saving for retirement. Whether you need a financial advisor will depend on your financial goals, risk tolerance, and investment experience. Some people may prefer to handle their own investments, while others may benefit from the guidance of an investment advisor.
How do I determine my risk tolerance?
Risk tolerance is an individual’s willingness to accept financial risk in pursuit of potential returns. Factors that may affect how much risk you’re willing to take include age, financial goals, and personal comfort level with risk.
Can I lose money by investing?
Investing always carries some level of risk, as the value of your investments can fluctuate and be impacted by various market conditions and economic events. It’s crucial to understand the risks associated with any investment and to consider your risk tolerance and investment objectives before making any investment decisions.
Diversifying your portfolio and not investing more money than you can afford to lose can help mitigate potential losses. Always be sure to do your research and consider seeking investment advice from a financial advisor before making any decisions.
When an investor buys a security using a margin account, the initial margin or initial margin requirement is how much of the purchase price – represented as a percentage – that the investor must cover with either cash or the collateral in that account.
The Federal Reserve Board’s Regulation T sets the minimum initial margin at 50%, meaning investors trading on a margin account must have cash or collateral to cover at least half of the market value of the securities they buy on margin.
Using Initial Margin
Investors who want to open a margin account at a brokerage must first deposit the initial margin requirement. They can make that deposit in the form of cash, securities or other collateral, and the amount they deposit will vary depending on how much trading the investor plans to do on margin, and where the brokerage firm sets its initial margin.
Once the investor makes that initial margin deposit as collateral, they essentially have a line of credit with which they can begin margin trading. That line of credit allows the investor to buy securities with money borrowed from the brokerage.
As noted, Regulation T sets minimum initial margin levels. It’s important to note, however, that the Federal Reserve Board’s Regulation T only sets the minimum for margin accounts. Brokerage firms offering margin accounts can set their initial margin requirement higher than 50% based on the markets, their clients, and their own business considerations. But brokerages cannot set the initial margins for their clients any lower than 50%. The level that a brokerage sets for margin is known as the “house requirement.”
Risks of Margin Trading
Trading on margin brings its own unique set of opportunities and risks. It can lead to outsized profits if investors buy appreciating stocks on margin. But if investors buy sinking securities on margin, they can lose even more than if they’d purchased the securities outright.
In the unfortunate situation where the securities purchased on margin lose all value, the investor must deposit the full purchase price of the securities to cover the loss. Given these risks, you’re typically not able to trade on margin in retirement accounts such as an IRA or a 401(k).
Sometimes investors use margin to short a stock, or bet that it will lose value. In that instance, they’d borrow shares from the brokerage firm that holds a position in the stock and sell them to another investor. If the share price goes down, the investor can purchase them back at a lower price.
In general, investors looking for safer investments might want to avoid margin trading, due to their inherent risk. Investors with a high appetite for risk, however, might appreciate the ability to generate outsize returns. 💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
How Do You Calculate Initial Margin?
An investor who wants to trade in a margin account, must first determine how much to deposit as an initial margin. While that will depend on how much the investor wants to trade, and how big a role margin will play in their strategy, there are some guidelines.
The New York Stock Exchange and some of the other securities exchanges require that investors have at least $2,000 in their accounts. For day traders, the minimum initial margin is $25,000. Each brokerage has its own set of requirements in terms of the amount clients need to keep as collateral, and the minimum size of the account necessary to trade on margin.
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Initial Margin Requirement Examples
It’s possible, for example, that a brokerage firm might require 65% initial margin. That’s the first number an investor needs to know. The next is how much they plan to invest. The initial margin calculation simply requires the investor to multiply the investment amount by the initial margin requirement percentage. For an investor who wants to buy $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.
The advantage for the investor is that they get $20,000 of exposure to that stock for only $13,000. In a scenario where the investor is buying a stock at a 50% margin, that investor can buy twice as many shares as they could if they bought them outright. That can double their return if the stock goes up. But if the stock drops, that investor could lose twice as much money.
If the price falls far enough, the investor could get a margin call from their broker. That means that they must deposit additional funds. Otherwise, the broker will sell the stock in their account to cover the borrowed money. 💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Initial Margin vs Maintenance Margin
For investors who buy securities on margin, the initial margin is an important number to know when starting out. But once the investor has opened a margin account at their brokerage, it’s important to know the maintenance margin as well.
The maintenance margin is the minimum amount of money that an investor has to keep in their margin account after they’ve purchased securities on margin. It is generally lower than the initial margin.
Currently, the minimum maintenance margin, as set by the Financial Industry Regulatory Authority (FINRA,) is 25% of the total value of the margin account. As with the initial margin requirements, however, 25% is only the minimum that the investor must have deposited in a margin account. The reality is that brokerage firms can – and often do – require that investors in margin accounts maintain a margin of between 30% to 40% of the total value of the account.
Some brokerage firms refer to the maintenance margin by other terms, including a minimum maintenance or a maintenance requirement. The initial margin on futures contracts may be significantly lower.
Maintenance Margin Example
As an example of a maintenance margin, an investor with $10,000 of securities in a margin account with a 25% maintenance margin must maintain at least $2,500 in the account. But if the value of their investment goes up to $15,000, the investor has to keep pace by raising the amount of money in their margin account to reach the maintenance margin, which rises to $3,750.
Maintenance Margin Calls
If the value of the investor’s margin account falls below the maintenance margin, then they can face a margin call, or else the brokerage will sell the securities in the account to cover the difference between what’s in their account and the maintenance margin.
With a maintenance margin, the investor could also face a margin call if the investment goes up in value. That’s because as the investment goes up, the percentage of margin in relation by comparison goes down.
The Takeaway
Initial margin requirements and maintenance margins are just two considerations for investors who are looking to trade on margin. They allow investors to understand how much cash they need to hand on hand in order to trade on margin — and when they might be susceptible to a margin call.
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FAQ
What is an example of initial margin?
If initial margin is 65% and an investor wants to purchase $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.
Is initial margin refundable?
Yes, initial margin is refundable, as it acts as a deposit put forward to enact a transaction or trade.
Why is initial margin important?
Initial margin is important because it acts as a form of collateral to cover a loss in the event loses money using borrowed funds. It helps the lender – or brokerage – recoup some of those losses.
Why is initial margin paid?
Initial margin is paid or put forth to act as a deposit or a form of collateral and establish good faith between a borrower and lender, typically an investor or trader and their brokerage.
Who sets the initial margin requirement?
Initial margin requirements are established by the Federal Reserve’s Regulation T. But there can also be other requirements put in place by an individual brokerage, and FINRA’s additional margin rules can further increase the amount.
Does initial margin have to be cash?
Generally, initial margin needs to be in the form of cash deposits, but it’s possible that some brokerages will allow it to take the form of other securities, such as government bonds.
Is initial margin a cost?
Initial margin is not a cost per se, but a form of collateral, and is money that is returned or refunded like a deposit. As such, it’s not spent or a typical “cost,” though it may be a financial barrier of sorts for some traders.
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In the coveted Los Angeles neighborhood of Los Feliz, every residence tells a story, and every street corner holds a piece of Hollywood history.
This hillside enclave, gracefully abutting Hollywood and weaving through parts of the Santa Monica Mountains, offers a unique blend of metropolitan allure and serene, natural landscapes — and owning a home here is a symbol of status and exclusivity.
The neighborhood is anchored by one of the largest city-owned parks in the country, the historic Griffith Park, a cornerstone that lends the neighborhood an air of tranquility, uncommon in large urban settings.
“Due to the proximity to historic Griffith Park, Los Feliz enjoys less density and more natural ambiance than most other large metropolitan areas,” shares Konstantine Valissarakos, one of the most preeminent real estate agents in Southern California, deeply acquainted with the area’s charm.
The neighborhood is also home to the two Los Feliz Villages, brimming with quaint, world-class restaurants and amenities. These local treasures craft a sense of belonging, making residents feel part of a “loving neighborhood” – a sentiment hard to find in the bustling city of Los Angeles.
“The two Los Feliz Villages offer quaint, world-class restaurants and amenities, making Los Feliz residents feel like they are in a loving neighborhood,” Valissarakos added, noting that “Los Feliz compares in popularity to other worldwide destination cities where the inhabitants can live anywhere globally that they want and feel special.”
Known for being a top home-buying destination for A-listers and architecture aficionados alike, the area has witnessed a significant surge in home prices, reflecting its growing demand.
“Los Feliz is home to many celebrities. Home prices have gone up in Los Feliz in recent years to match the demand,” the agent adds, highlighting the neighborhood’s appeal. “Finding a characterful or historic home in Los Feliz, akin to an art piece residence, has become a coveted dream for many.”
So then, what homes can you find in the sought-after area?
We’ve reached out to some of the top real estate brokerages with active listings in the area, to give you a feel of the type of homes you can buy in Los Feliz — but be warned, they come with steep price tags.
These figures, though eyebrow-raising, are not at all uncommon for Los Feliz, a Los Angeles neighborhood that has luxury and exclusivity woven into its very fabric.
Standout Los Feliz houses for sale, from a sprawling $38 million historic estate to a film director’s fully restored Tuscan chateau
Owning a piece of Los Feliz is not just about buying property; it’s about embracing a lifestyle desired by many but lived by a few.
And the following listings, all of them Los Feliz houses with a storied past and highly desirable attributes, stand as a testament to the caliber of properties that you can find in the sought-after area. Let’s take a closer look, shall we?
#1 The Cockerham Estate, a $38 million Old World Tuscan chateau
The crown jewel of the neighborhood, the Cockerman Estate is a beautifully reimagined 1914 historic property that’s currently both the largest and highest-priced house for sale in Los Feliz.
Custom-built for Los Feliz’ prolific developer William Mead in 1914, the multi-structure private compound spans two acres and is anchored by a 20,000-square-foot mansion, offering 9 bedrooms, 9.5 baths, and an endless list of upscale amenities.
Meticulously renovated throughout by its current owners, entrepreneur Myra Chan and her husband — with design and oversight by prized architect William Heffner AIA of Studio William Heffner — the Cokerham Estate welcomes visitors with a grand 2-story entry with sweeping staircase and honed marble floors that sets the stage for the luxury we find inside.
Notable features include an elegant library and living room with imported stone fireplace, a bar/lounge (also with an eye-catching fireplace and custom wood details), an expansive kitchen with a breakfast room, fireplace, center island, and a separate prep kitchen along with a covered heated terrace and full outdoor kitchen.
We’d also like to give a nod to the massive primary with a sitting room suite, marble fireplace, terrace with views, his and hers baths, and large walk-in closets.
Listed for $38,000,000 with Brett Lawyer of Carolwood Estates, the massive Los Feliz house also comes with a lower-level entertainment space (which includes a bar and lounge), a home gym with head-on city views, a steam room, infrared sauna and salon/glam room area, and an oversized garage with elevator directly servicing all floors.
#2 A Spanish Colonial Revival estate that dates back to 1929, listed for $15.9M
A timeless gem, this Harry Hayden Whiteley, AIA-designed estate blends the grandeur of Mediterranean estates with the allure of old Hollywood glamour.
With 5 bedrooms and 9 bathrooms in the principal residence and 1 bedroom and 2 bathrooms in the detached guest house, the estate sits proudly on a nearly one acre-sized lot, offering sweeping views that stretch across the LA basin and beyond.
The home greets visitors with a grand two-story rotunda entry, adorned with hand-painted art and a sweeping staircase. The grand living room, featuring hardwood floors, an ornate fireplace, and a balcony, overlooks a pool and the cityscape.
A library with a unique coffered ceiling and a Prohibition-style bar, and a majestic dining room with a wood ceiling and French doors to a veranda enhance its appeal.
The chef’s kitchen is equipped with top-grade appliances and a large island. Upstairs, five luxurious bedroom suites preserve the 1920s charm, with the primary suite offering a spa-like bathroom and walk-in dressing closets.
Additional features of the $15.9 million Los Feliz house — listed with top producer Rita Whitney of The Agency — include a gym, a 2,200+ bottle wine vault, a media room with a wet bar, and a sauna. Lush grounds, a four-car garage, and a motor court complete this exquisite Southern California estate.
#3 An Architectural Digest-featured $9.9M house that’s a piece of Hollywood history
Set on one of Los Feliz’ most coveted streets, Bonvue Avenue, this 5,447-square-foot home is like a trip back in time to Hollywood’s golden era.
And its beauty was just as appreciated back then as it is now — the Spanish Colonial was even featured in Architectural Digest soon after it was built, in 1925.
Sited hillside, the multi-tiered property at 4808 Bonvue Ave takes full advantage of panoramic city views while providing complete privacy at street level. The property is listed at $9,995,000 with Marci Kays and Jonathan Mogharrabi with Carolwood Estates.
Offering 5 bedrooms and 6 baths, the meticulously renovated and well-maintained Los Feliz house features a double-height grand living room with coffered, hand-painted ceilings, towering French doors, a step-down den and wet bar, all accessed from the scene-stealing foyer staircase.
The imported English wood-paneled formal dining room includes a second-level verandah, an ornamental plaster ceiling, and stained glass vignettes — a bespoke detail that runs throughout the home and compliments the many hand-painted oak doors.
A chef’s kitchen, 600-bottle wine cellar, elevator, family room, library, staff rooms, and home offices all round up the home’s interior amenities.
But the amenities continue outside, where the extensive grounds feature multi-level terraces, gravel pathways, hidden gathering spaces and repurposed speak-easy, outdoor dining, and an abundance of fruit trees.
A formal lawn with a period fountain leads to a private pool that’s only visible from the home, adding an extra note of charm and seclusion.
#4 Villa Collina, a $7.245M trophy estate once owned by film director James Whale
Remember when we said that most Los Feliz houses tell a story, and every street corner holds a piece of Hollywood’s history?
This following property is no exception, as it was once home to lauded film director James Whale, best known for directing classic horror films including Frankenstein (1931), The Old Dark House (1932), The Invisible Man (1933), and The Bride of Frankenstein (1935), among others.
Before it was purchased by James Whale, Villa Collina was originally built for Clement E. Smoot, an American golfer who competed in the 1904 Summer Olympics — where the American team won the gold medal.
The architect, Henry Harwood Hewitt, is known for designing several staple properties across Los Angeles, including poet Alice Lynch’s former home and the Westlake Masonic Temple in Los Angeles in 1914.
Touted as a “One-of-a-kind authentic dramatic Old World Tuscan chateau in epic setting on a huge flat hilltop lot in prime Los Feliz” per the listing, the 4-bed, 4-bath villa was completely restored before hitting the market for $7,245,000.
Nourmand & Associates agent Konstantine Valissarakos and Richard Yohon at Sotheby’s hold the listing.
Among its many features, 4565 Dundee Drive lists an entertainer’s kitchen with chef’s appliances, built-in breakfast nook and French doors, a primary suite with a fully updated deluxe bath with double sinks, a private office and den, and a redesigned hotel-style full guest apartment which doubles as an oversize spa.
Outside, a well-groomed garden, landscaping, and fountains bring peace and tranquility to the property, while a backyard oasis — with a tiled Roman pool and gazebo with built-in seating — lets guests and residents take in the stellar views.
#5 A Weber and Spaulding-designed architectural gem listed for $5.995M
Before Sumner Spaulding and Walter Weber — the architects behind silent film star Harold Lloyd’s 44-room Greenacres mansion — designed Santa Catalina Island’s storied Catalina Casino, they created this residential gem in Los Feliz.
Located in prime Los Feliz at 3659 Shannon Road, the home was designed to make the most of the panoramic views of the hills and LA city lights with original oversized French doors opening up from the first floor onto the sunny backyard, outdoor dining area, and pool deck.
Boasting 7 bedrooms and 7 baths across 6,408 square feet of living space, the 1928-built home retains many original features, including the classic moldings, hardwood floors, built-ins, the dumbwaiter, and double staircases.
Other unique features of the elegant Los Feliz house include three fireplaces, a first-floor library, a formal dining room, living room, and family room, a first-floor bedroom suite, and a dramatic arched hallway connecting the 6 bedrooms upstairs and the office.
There’s also a massive family room with a fireplace on the lower floor, which opens to a separate section of the yard.
This beautiful property is also listed with Konstantine Valissarakos of Nourmand & Associates and Rick Yohon of Sotheby’s.
Which one of the striking Los Feliz houses above do you like most?
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In this episode of The Kings Table, we discuss an event that has rocked the real estate world: the National Association of Realtors and top residential brokerages being ordered to pay $1.8 billion in damages to approximately half a million home sellers. They were found liable for artificially inflating home sale commissions, a decision that is poised to reshape the industry.
For the full episode, find Mike Ayala’s Investing for Freedom wherever you listen to podcasts.
Meet the hosts:
1. Mike (The Sage) Ayala is an accomplished investor, speaker, and podcast host, who stands at the helm of Investing for Freedom, guiding busy professionals and entrepreneurs toward the path of genuine liberation and optimal living. 2. Ashish (Hostess with the Most-est) Nathu is a founder and CEO, entrepreneur, real estate investor, triathlete, and host of the Rich Equation Podcast. 3. Matt (Hero of Hospitality) Aitchison is a distinguished real estate investor, captivating speaker, and committed philanthropist. 4. Aaron (The Trend Spotter) Amuchastegui is a seasoned real estate virtuoso with a remarkable track record of over 1,000 house transactions, predominantly acquired through astute foreclosure purchases at courthouse auctions.
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Usually, you will have access to exam preparation materials. Keep in mind that, before you can take them, some exams require you to provide proof of completing specific pre-licensing courses. 5. Apply for your real estate license To apply for your real estate license, submit your documents to the real estate board in your state. … [Read more…]
Jump to winners | View PDF Recognising the mortgage professionals andcompanies across Asia-Pacific, North America,and the UK who have excelled and raised the bar All throughout 2023, Key Media’s 30-strong Intelligence Unit researched and produced a series of Special Reports, each showcasing the top-performing mortgage professionals and companies across a number of important professional categories. All of … [Read more…]
More home sellers on the East Coast are getting in on the commission lawsuit action.
Plaintiffs in Florida and Pennsylvania filed lawsuits on Monday, accusing real estate industry players of allegedly colluding to artificially inflate real estate agent commissions. Both lawsuits are seeking class-action status.
Similar to the other commission lawsuits, the latest two take aim at the National Association of Realtors’ Participation Rule, which requires the listing broker to make a blanket offer of compensation to the buyer’s broker to list the property on the MLS.
The Florida commission lawsuit was filed by Parker Holding Group, a Panama City-based firm that sold homes in March and August 2021, in Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County.
Defendants in the lawsuit include the Florida Association of Realtors, the nation’s largest state Realtor group with 238,000 members, and 16 large local brokerages, with agent counts ranging from 655 to nearly 4,000. Brokerages named in the suit include The Keyes Company, LPT Realty, Charles Rutenberg Realty, Charles Rutenberg Realty-Orlando, United Realty Group, The K Company Realty, Florida Homes Realty & Mortgage, Dalton Wade, Avanti Way Realty, MVP Realty Associates, Florida Realty of Miami, Lifestyle International Realty, Watson Realty, Premiere Plus Realty, Future Home Realty and Michael Saunders & Company.
Like the other commission lawsuits, the Parker suit alleges that the defendants colluded “to impose, implement, and enforce anticompetitive restraints that cause home sellers in Florida to pay inflated commissions in connection with the sale of their homes.”
Because this is a state lawsuit, the complaint claims the alleged behavior is in violation of the Florida Antitrust Act of 1980 and the Florida Deceptive and Unfair Trade Practices Act, and not the Federal Sherman Antitrust Act.
The complaint names local Realtor associations, MLSs and the brokerages’ employees and agents as co-conspirators, accusing them of using their control over the state’s Realtor association-affiliated MLSs to impose rules from NAR that allegedly promote anticompetitive practices.
“In a raw demonstration of market power, the Florida Realtor MLSs overturn the natural order of a rational price system where home sellers and home buyers each separately bargain and pay for the services provided to each of them,” the complaint alleges.
The proposed class for the suit includes all Florida citizens who have sold a property through one of the state’s Realtor association-affiliated MLSs and paid a buyer broker commission between Dec. 4, 2019 and the present.
The plaintiffs are demanding a jury trial, treble damages, coverage of the cost of the suit and a permanent injunction “to permanently enjoin and restrain Defendants from establishing the same or similar rules, policies, or practices as those challenged in this action in the future.”
In an email, Florida Realtors’ general counsel Juana Watkins wrote that the group denies these allegations.
“Florida Realtors will defend against this action,” Watkins wrote. “Florida Realtors® stands by the value of the professional expertise that its members provide to their clients. Going forward, Florida Realtors® does not comment on pending litigation.”
Juan Baixeras, the broker/owner of family-run Florida Realty of Miami, said he is hopeful that the state Realtor association will help him out and offer guidance.
“These allegations are absurd. It’s just law firms trying to cash in on the previous success of the other lawsuit,” he wrote in an email. “We have never fixed prices. Our commission has always been negotiable. We are a 100% commission office, we get paid a flat fee of $355 no matter what commission comes in. So, price fixing commissions would not help us at all, we would still make $355.”
Another commission lawsuit in Pennsylvania was filed by Homesellers Spring Way Center, John and Nancy Moratis and Nancy Wehrheim in U.S. District Court for the Western District of Pennsylvania. Defendants in the suit include West Penn MLS, a local broker-owned MLS that is not affiliated with NAR, and eight local brokerages, including Berkshire Hathaway HomeServices The Preferred Realty, NRT Philadelphia LLC, Piatt Sotheby’s International Realty, NextHome PPM Realty, NextHome Dynamic, Realty One Group Gold Standard, Realty One Group Platinum and Realty One Group Horizon.
Despite not being affiliated with a Realtor association, West Penn MLS has adopted a rule similar to NAR’s Participation Rule.
The complaint alleges that the rule is anticompetitive because “it compels the seller to compensate the broker representing the purchaser even though that broker should be working for the purchaser, not the seller; it mandates a ‘blanket offer,’ meaning that the same compensation must be offered to every buyer’s broker, regardless of skill, experience, or the services provided; and it has the effect of encouraging ‘steering’ by buyer-brokers, because it incentivizes them to direct their clients to properties with higher commission offers.”
The Center suit complaint cites the Sitzer/Burnett case, stating that the defendants’ alleged practices “are not unique; rather, they are part and parcel of nation-wide collusion within the real estate industry to maintain inflated commissions.”
The lawsuit also names co-conspirators, including “local and state Realtor associations,” as well as “other brokerages within that geographic area.”
The proposed class for the lawsuit includes all home sellers who used a listing agent or broker affiliated with or employed by one of the brokerage defendants in the sale of a home listed on the West Penn MLS, and who paid a commission to the buyer’s broker.
This suit also demands a jury trial, treble damages, coverage of the cost of the suit and a permanent injunction “enjoining Defendants from (1) requiring that sellers pay the buyer broker and (2) continuing to restrict competition among residential real estate brokers in the manner set forth above,” according to court records.
The two new commission lawsuits are just the latest in an ever-growing pile of copycat cases that have been filed since late October when a Missouri jury found the real estate industry liable for colluding to artificially inflate agent commissions in the Sitzer/Burnett trial. A motion for injunctive relief has yet to be filed in that lawsuit and a final ruling from the judge is not expected until spring 2024.
Editor’s note: HousingWire reached out to all of the defendants in the latest lawsuits for comment and will update this story as comments are returned.
A red herring is a preliminary prospectus filed by a company that’s planning an initial public offering, or IPO. While a red herring prospectus includes coverage of the company’s operations, total estimated IPO amount, management and competitive market standing, it doesn’t reveal the share price or number of shares to be issued.
The SEC reviews the red herring prospectus, and all subsequent iterations, to make sure that all information is accurate before allowing the company to transition to the final investment prospectus phase.
A red herring prospectus has both investment and regulatory implications for companies heading toward an IPO, and any investors who may be interested in obtaining IPO stock.
Key Points
• A red herring in an IPO is a preliminary prospectus filed by a company that provides information on operations, estimated IPO amount, management, and market standing.
• A red herring is not final, and investors must take into considerations that the filing doesn’t include the share price for the IPO or the number of shares to be issued.
• The SEC reviews a red herring prospectus to make sure that all information is accurate before allowing the company to transition to the final investment prospectus phase.
• Red herrings offer investors some insight into the pros and cons potentially associated with trading IPO shares of the company in question.
IPOs, Explained
An initial public offering is the process through which a private company goes public, with shares of the company’s stock available to the investing public. The term “initial public offering” simply refers to a new stock issuance on a public exchange, which allows corporations to raise money through the sale of company stock.
Red Herring Prospectus
When a company transitions from a private company to public stock issuance, they must file a prospectus, a formal document sharing the new company’s structure, the purpose of the issue, underwriting, board of directors, and other relevant details with the Securities and Exchange Commission (SEC).
That prospectus, while not final, may help potential investors make investment decisions based on the information included in the prospectus. A prospectus doesn’t just cover stocks — it’s also required for bonds and mutual funds.
While all stocks include some degree of risk, IPO shares are particularly high-risk investments. Despite the media hype around many IPOs, which often focuses on big wins, the history of IPOs shows plenty of losses as well, owing to the volatility of these shares.
The risks associated with IPO stock is a significant reason why investors are typically asked to meet certain requirements in order to trade IPO shares through a brokerage. 💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.
How a Red Herring Works
Prospectuses are dynamic and change regularly, as new information about a company comes forth. So, an investment prospectus will likely have multiple drafts before a final draft is released after SEC review.
In a red herring document, the prospectus is incomplete and noted as such, with the word “Red Herring” included on the prospectus cover. That disclaimer lets readers know not only that the prospectus is incomplete, but also that the company has filed for an upcoming IPO. The term “red herring” refers to both the initial prospectus and the subsequent drafts.
Additionally, a stock cannot complete its IPO until it fulfills the S-1 registration statement process, which is a primary reason why a red herring prospectus doesn’t include a stock price or the number of shares traded.
The SEC will review a red herring prospectus prior to its release to ensure that all information is accurate and that the document does not include any intentional discrepancies, falsehoods, or misleading information.
Recommended: A Guide to Tech IPOs
Once regulators clear the registration statement, the company can go ahead and transition out of the red herring IPO phase and enter into the final investment prospectus phase. The time between the approval of the registration process and the time that it reaches its “effective date” (which clears the stock for public trading) is 15 days.
In clearing the IPO for stock market trading, the SEC confirms the necessary information is included in the final prospectus, and that the information is accurate and compliant, based on U.S. securities law. Once the company gets through that hurdle they can continue moving through the IPO process. 💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.
Red Herring Pros and Cons
Any investor looking to invest in an IPO stock should understand the benefits and investment risks when it comes to red herrings and in investing in IPOs.
Red Herring Advantages
• Useful overall information on the company. While investors won’t find any information on pricing or share amounts, they can review company history, operational strategies, management team, potential IPO amount, and market performance, among other company particulars.
• Some financial data points. Red herring IPOs may provide valuable information about how a company plans to use proceeds from an IPO stock offering. Knowing, for example, that a company plans to use stock proceeds to grow the company or to pay down debts gives investors a better indication of company direction, which they can use to make more informed investment decisions.
• Risk factors. Under a section known as “Risk Factors”, a soon-to-be publicly-traded company lists any potential risk factors that could curb performance and growth. Legal or compliance problems, abundant market competition, and frequent management turnover are just some of the potential risks included in a red herring IPO prospectus – and investors should factor those risks into any potential investment decision.
Red Herring Disadvantages
• No pricing data. The biggest drawback of red herring IPO prospectus is the fact that the documents don’t provide any guidance on IPO stock pricing or number of shares available. These are obviously critical components of any investment decision, but investors must wait until the registration statement process is fully complete before that data is available.
• Shifting information. IPO company information can and does change from document version to version. Investors need to be diligent and stay apprised of all information on red herring prospectuses, from version to version, if they’re interested in an IPO stock.
• Uncertainty. If government regulators cite deficiencies in a red herring prospectus they may half the IPO process until they’re addressed.
Recommended: SPAC IPO vs Traditional IPO: Pros and Cons of Investing in Each
Red Herring Example
A red herring prospectus when filed with the SEC may have the words “Red Herring” stamped on the document as a reminder to prospective investors that the information in the document is subject to change, and that the securities (i.e. shares of stock, or bonds) are not available for sale until the SEC has approved the final prospectus.
The statement typically included in a new company’s prospectus may say:
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
The Takeaway
The red herring prospectus is the first version of a new IPO company S-1 prospectus, and may be the first detailed impression that institutional investors and the investing public gets of an initial public offering.
By providing all the necessary information on a new publicly traded company (minus the opening share price and the number of shares available), a red herring prospectus can introduce investors to a new stock, which can provide much of the information necessary for investors to decide whether they’re interested in the company, and willing to assume the risks involved in trading IPO shares (if eligible).
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it’s wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
How does a red herring document differ from the final prospectus?
The red herring document is usually shorter than the final filing with the SEC. In addition the final document contains the number of shares in the IPO, as well as the IPO price.
Are there any legal or regulatory requirements associated with red herring documents?
Yes. The SEC must validate all claims and data included in the red herring to ensure that it does not include any false information, or anything that might violate existing laws and regulations. Once the red herring passes muster,
Can investors rely on the information provided in a red herring document when making investment decisions?
Investors may use the red herring document to inform their basic understanding of the company that is seeking an IPO, but it may not be enough to guide an actual decision to buy shares.
Are there any risks or limitations associated with red herring documents that investors should be aware of?
Red herring documents are an important part of a new company’s IPO process, and as such they contain key information about the company, but investors need to be aware that the details are not finalized, and the terms may change before the final prospectus is filed.
Photo credit: iStock/GOCMEN
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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures. 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.