May
11
2021
How-To: Building a Well-Balanced Crypto Portfolio
There may be growth opportunities in the cryptocurrency market. What you might want to know to build a diverse cryptocurrency portfolio.
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SoFi
Student Loan Consolidation and Refinancing
May
11
2021
Bitcoin Hash Rate and Why It Matters
This year, Bitcoin’s hash rate reached an all time high. What is hashing power, and how does it affect investors?
Read moreMay
11
2021
Trade vs. Settlement Date: What’s the Difference?
There are two important dates to know when making an investment: the trade date and the settlement date.
When an investor’s buy or sell order gets confirmed in a brokerage account, the day this occurs is known as the trade date. But behind the scenes, the real transaction has yet to take place. A security goes through a settlement process in order for the transfer from a seller to a buyer to occur.
This delay between the day a transaction is made and the day the underlying security ownership has been settled is a period known as T+2 in financial markets. Here’s a closer look at this process.
Why Is There a Delay Between Trade and Settlement Dates?
Given modern technology, it seems reasonable to assume that everything should happen instantaneously.
But the current settlement rules go back decades, way back to the creation of the Securities and Exchange Commission (SEC) in 1934, when all trading happened in person and on paper.
Back then, a piece of paper representing shares of a security had to be in the possession of traders in order to prove they actually owned the shares. Moving this paper around sometimes took as long as five business days after the trade date, or T+5.
Recommended: A Brief History of the Stock Market
What is the T+2 Rule?
The T+2 rule refers to the fact that it takes two days beyond a trade date for a trade to settle. For example, if a trade is executed on Tuesday, the settlement date will be Thursday, which is the trade date plus two business days.
Note that weekends and holidays are excluded from the T+2 rule. That’s because in the U.S., the stock market is open from 9:30 a.m. to 4:00 p.m. Eastern time Monday through Friday.
The T+2 rule has been enforced by the SEC since 2017. Before then, the T+3 rule was in place.
What Investors Need to Know About T+2
This delay in settling applies to trading of almost all securities. An exception is Treasury bills, which can settle on the same day they are transacted.
Investors who plan on engaging in cash account trading need to know about trade vs. settlement date. Cash accounts are those in which investors trade stocks and exchange-traded funds (ETFs) only with money they actually have today. Meanwhile, margin trading accounts allow investors to trade using borrowed money or trade “on margin.”
An investor may notice two different numbers describing the cash balance in his or her brokerage account: the “settled” balance and the “unsettled” balance. Settled cash refers to cash that currently sits in an account. Unsettled refers to cash that an investor is owed but won’t be available for a few days.
T+1? T+0? Real-Time Settlement?
Market observers have called the T+2 rule to be reevaluated, as the settlement process may be able to be sped up and improve trading conditions.
In February, the clearinghouse for U.S. stock trades–the Depository Trust & Clearing Corp.–said in a report that the settlement process should be changed from two days to one. Clearinghouses are middlemen in financial markets that ensure the transfer of a security goes through. They stand ready in case one side of a transaction–either the buyer or seller–defaults.
The DTCC, which cleared $1.77 trillion of securities trades on average each day in 2020, was already researching settling. However in January, wild price swings in so-called meme stocks–those popular on social-media platforms like Reddit–led to trading restrictions of these shares. This, in turn, prompted greater scrutiny of regulations and rules around clearing and settlement.
Moving to T+1, T+0 or real-time settlement would need the approval of the SEC and collaboration of dozens of players across Wall Street. But the real-time transactions made possible in the cryptocurrency market by blockchain technology have escalated chatter for modernizing securities markets.
Potential Violations of the Trade Date vs. Settlement Date
Comprehending the difference between trade date vs settlement date can allow investors avoid potentially costly violations of trading rules.
The consequences of these violations could differ according to which brokerage an investor uses, but the general concept still applies. Violations all have one thing in common: They involve trying to use cash or shares that have yet to come under ownership in an investor’s account.
Cash Liquidation Violation
To buy a security, most brokerages require investors to have enough settled cash in an account to cover the cost. Trying to buy securities with unsettled cash can lead to a cash liquidation violation, as liquidating one security to pay for another requires settlement of the first transaction before the other can happen.
Let’s look at a hypothetical example. Say an investor named Sally wants to buy $1,000 worth of ABC stock. Sally doesn’t have any settled cash in her account, so she raises more than enough by selling $1,200 worth of XYZ stock she has. The next day, she buys the $1,000 worth of ABC she had wanted.
Because the sale of XYZ stock hadn’t settled yet and Sally didn’t have the cash to cover the buy for ABC stock, a cash liquidation violation occurred.
Investors who face this kind of violation three times in one year can have their accounts restricted for up to 90 days.
Free Riding Violation
While a free ride might sound like a good thing, in this case it’s definitely not. Free riding violations occur when an investor buys stock using funds from a sale of the same stock.
For example, say Sally buys $1,000 of ABC stock on Tuesday. Sally doesn’t pay her brokerage the required amount to cover this order within the two-day settlement period. But then, on Friday, after the trade should have settled, she tries to sell her shares of ABC stock, since they are now worth $1,100.
This would be a free riding violation. Sally can’t sell shares she doesn’t yet own in order to purchase those same shares.
Incurring just one free riding violation in a 12-month period can lead to an investor’s account being restricted.
Good-Faith Violation
Good-faith violations happen when an investor buys a security and sells it before the initial purchase has been paid for with settled funds. Only cash or proceeds from the sale of fully paid-for securities can be called “settled funds.”
Selling a position before having paid for it is called a “good-faith violation” because no good-faith effort was made on the part of the investor to deposit funds into the account before the settlement date.
For example, if Sally sells $1,000 worth of ABC stock Tuesday morning, then buys $1,000 worth of XYZ stock Tuesday afternoon, she would incur a good-faith violation (unless she had an additional $1,000 in her account that did not come from the unsettled sale of ABC).
As we can see by these examples, it’s not hard for active traders to run into problems if they don’t comprehend cash account trading rules, all of which derive from trade date vs. settlement date. Having adequate settled cash in an account can help avoid issues like these.
The Takeaway
The trade date is the day an investor or trader books an order to buy or sell a security. But it’s important for market participants to also be aware of the settlement date, which is when the trade actually gets executed.
For many securities in financial markets, the T+2 rule applies, meaning the settlement date is usually two days after the trade date. An investor therefore will not legally own the security until the settlement date.
While there’s been chatter that the settlement process needs to speed up to either T+1 or real-time settlement, it’s still important for investors and traders to know these rules so they don’t make violations that lead to restricted trading or other penalties.
Don’t have a plan when it comes to where to begin investing? SoFi Invest® can help. There are no account minimums, and we even have financial planners ready to answer all of your questions, from financial planning to account rules.
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 . 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) Cryptocurrency is offered 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, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN20131
Read moreMay
10
2021
DRIP Investing: Finding Dividend Reinvestment Stocks
Dividend Reinvestment Plans, or DRIPs, are programs that automatically invest cash from dividends into additional shares of the stock making those dividend payments.
Stock investors can enroll in DRIP programs as a way to take advantage of compounding returns, dollar-cost averaging and potential discounts on shares purchases.
Investors can sign up for DRIP programs through the public companies themselves, brokerage firms, or take on a do-it-yourself approach and reinvest dividends themselves.
Here’s a closer look on how to get started with DRIP investing.
Dividends Overview
Dividends are distributed payments of corporate profits to shareholders. Companies can reinvest profits into their businesses or divvy them for shareholders. When they do the latter, those payments are called dividends.
The majority of dividends are paid quarterly, so four times a year. But some stocks or exchange-traded funds (ETFs) pay dividends monthly or annually.
Some companies don’t make enough money to cover their expenses and pay shareholders dividends. Most companies that pay dividends tend to be larger and have stable, reliable businesses.
Some of the most popular and effective DRIPS are offered by Dividend Aristocrats. These are companies that have increased their dividend payouts every year for at least 25 years.
Recommended: How Dividends Work
How Do Dividend Reinvestment Plans Work?
When an investor buys shares in a company that pays dividends, those dividends normally get paid out as a direct deposit or check. If investors sign up for a DRIP program, they have the option to reinvest the dividends rather than receiving the payout.
The reinvested dividends go towards additional shares of the same stock. When the dividend cash is reinvested, it can sometimes go into buying fractional shares–slices of whole shares. DRIP programs also often use dollar-cost averaging, or the practice of spreading out investments and making periodic purchases in order to mitigate the effect of stock volatility.
Investors must still report the dividends as taxable income even though they don’t receive them. Investors will want to consult a tax expert.
Recommended: Paying Taxes on Stocks
Many times, additional shares in DRIPs are purchased directly from the company. Usually DRIP shares are issued directly from the company’s reserves and can’t be resold on a public stock exchange. Some brokerage accounts offer DRIP shares to investors—usually for free or a small fee.
Example of DRIP
The DRIP offered by Company X offers shareholders dividends of $1.76 per share each year, or $0.44 each quarter. Shareholders who take advantage of the DRIP reinvest that money into more Company X shares.
If a shareholder owns 100 shares of Company X, they receive $44 in dividends every quarter. If Company X’s stock price is $88, the dividend reinvestment will buy the investor half of one share of stock.
Company DRIPS
For investors, participating in company DRIPs can be advantageous, especially when companies offer shares at a discounted rate. Some companies hire outside firms or transfer agents to run their DRIP.
Companies that offer DRIP shares can use the money from shareholders into growing their business. Also, DRIP shares are less liquid than regular shares since they can’t be sold on a public stock exchange. This means investors are more likely to hold onto the shares.
Shareholders in DRIPs tend to be stable, long-term stock holders, since they are using the program to grow their portfolio and have chosen to enroll in the plan with that particular company.
Brokerage DRIPs
Online brokerages DRIPs can be easier for investors looking to invest in multiple stocks. Shareholders can choose to enroll in DRIPs for all of their investments or just for select companies.
Some of the key advantages of DRIP programs used to be zero-commission stock purchases and the ability to buy fractional shares. But these days, many brokerages offer zero commission trading and fractional shares.
One disadvantage may be that brokerages don’t offer shares at a discounted level as company DRIPs do.
Pros and Cons for Investors
There are a number of reasons investors choose to reinvest their dividends through a Dividend Reinvestment Plan, and several reasons companies choose to offer them.
Pros for Investors
• Discounted Rate: Discounts on DRIP shares can be anywhere from 1% to 10%. Investors can also purchase fractional shares through DRIPS. This is useful because dividends payments may not be enough to buy an entire share of the stock.
• Zero Commission: DRIP programs can allow you to buy new shares without paying commission fees. However, many brokerages offer zero-commission trading outside of DRIPs these days.
• Fractional Shares: DRIPs may allow you to reinvest into fractional shares, rather than whole shares that may be at a pricier level than you wish to purchase.
• Compounding Returns: If an investor buys an asset which pays out interest or dividends, and then they reinvest those earnings into buying more of the asset, they are then earning on both their initial investment and on the interest. This is how compound interest grows investments.
• Automated Purchases: Investors can set up automatic reinvestment of their dividends into DRIP shares so they don’t even have to think about it after the initial set up.
Cons for Investors
• Less Liquid: DRIP shares aren’t as liquid as normal shares and can often only be sold back to the company directly. This means it will be difficult for an investor to quickly sell off shares.
• Need to Monitor: If an investor sets up automated DRIP investing, it can be easy to forget about the investment and not monitor it closely. Although the DRIP investment may be attractive at first, over time the market can change and the investor may want to allocate their money elsewhere, rebalance, or further diversify their portfolio.
• Limited Diversification: Investors sometimes use dividend income to invest in new stocks, but with DRIP investments they must invest the money back into more of the same stock. This further prevents portfolio diversification.
• Tax Reporting: Finally, figuring out tax reporting can be complicated with DRIPs. Investing in an IRA or using a brokerage account can help keep track of DRIP transactions. Again, consult a tax professional.
The Takeaway
In order to start earning with the DRIP method, investors must first own shares of stock in companies that offer dividend reinvestment. The share or shares must be owned in the investor’s name, not a broker’s name.
Since there are hundreds of companies to choose from, it can be challenging to figure out which DRIP is the best. SoFi Invest® offers a full suite of investment tools in an easy to use mobile app. Using the Active Investing platform, you can buy company stocks, ETFs and fractional shares, while electing to participate in available DRIP programs.
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 . 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) Cryptocurrency is offered 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, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SOIN20012
Read moreMay
07
2021
Centralized vs. Decentralized Exchanges: Six Differences to Consider
When it comes to crypto exchanges, there are advantages and disadvantages in both a decentralized vs centralized exchange. Ultimately, the choice an investor makes will likely depend on factors like their trading goals, comfort level with newer technology, and the importance they place on things like security and anonymity.
What Are Centralized and Decentralized Exchanges?
A centralized exchange involves one central entity (e.g. bank, trading platform, government institution, etc.) controlling the operations of the exchange and its wallets for different types of cryptocurrency. This can make things easier for users but can also present all the problems centralization can entail, like a single point of failure.
Decentralized exchanges (DEXs) have no one entity controlling them—instead transactions are made peer-to-peer—and are thought to be more secure because they have no single point of failure (as well as no employees who could steal funds). But these exchanges are still very new and can be more difficult to use, especially for those just learning crypto basics.
Recommended: 2021 Crypto Investing Guide
6 Key Differences Between Centralized and Decentralized Exchanges
Centralized and decentralized cryptocurrency exchanges are different in many ways. These are some of the major differences investors should know about.
1. Usability
One goal of centralized exchange platforms is to make it as easy as possible for new users to get started trading cryptocurrency. By design, creating an account and placing trades can be accomplished in very little time and with little technical expertise.
Decentralized exchanges, on the other hand, can make crypto investing somewhat more complicated. That’s primarily because 100% of the responsibility lies with the user, rather than a third party. If you make a mistake, there may be no way to fix it, whereas centralized exchanges sometimes have safeguards in place for certain user errors.
2. Security
Centralized exchanges, in their quest to make things easier for users, create a single point of failure. If hackers attack this single point with success and obtain private keys that protect users’ accounts, they can compromise the entire exchange and all of its funds. There have been several instances of this happening over the years, with ssers sometimes facing a total loss.
For those reasons, decentralized exchanges are thought to be more secure than centralized ones. Nothing’s ever for certain, and it might still be possible for a DEX to have some kind of bug. But for the most part, user error is a more common threat to DEX users than the exchange being hacked.
3. Fees
Centralized exchanges charge customers fees for their use of the service. Every transaction typically involves a fee and withdrawing coins may also come with a fee. For active traders, these fees may add up to large amounts over time.
Decentralized exchanges often have far fewer fees because they don’t have the same overhead expenses. Some decentralized exchanges don’t even have fees at all.
4. Liquidity
One of the biggest differences between centralized vs. decentralized exchanges is in liquidity.
Centralized exchanges tend to have more liquidity because they have more users, and these users are creating more orders. In-demand assets trade in higher volumes almost without fail. There are also market makers who further increase liquidity.
By contrast, because they typically have fewer users and no central entity organizing their order books, decentralized exchanges have less liquidity. The lack of liquidity in decentralized exchanges could pose problems for investors. For example, an investor may want to buy a particular asset but finds that high demand has led to a sharp rise in price compared to other markets, because other investors have bought up all the sell orders.
Recommended: What are Liquid Assets?
Liquidity and Slippage
Another example of a lack of liquidity causing problems for investors is if they attempt to sell an in-demand asset on a DEX—and end up falling victim to a lot of “slippage.”
Slippage refers to the losses that occur when selling large amounts of an asset, particularly in times of low liquidity. If someone wants to sell 100 tokens, for example, each at a price of $1, there may not be enough buy orders to actually sell them all at a price of $1. There might only be a buy order for 10 tokens at $1, then an order for 10 more at $0.99, 15 at $0.98, and so on. By the time a trader has liquidated their position, they wind up with less money.
Greater liquidity (such as one might find on a centralized exchange) means faster trades and less slippage.
5. Anonymity
Creating an account on a centralized exchange typically involves handing over lots of personal information. These exchanges might require a name, email address, mailing address, or even a selfie of the registrant holding their government-issued ID next to their face. This is typically done to comply with cryptocurrency regulations like know-your-customer (KYC) and anti-money-laundering (AML) laws.
Decentralized exchanges, on the other hand, might not require users to even create an account to get started. Traders can convert their gains into a centralized cryptocurrency like a stablecoin (one of many altcoins) and move those funds off the exchange to another crypto wallet, without needing to link a bank account.
6. Speed
Perhaps one of the most noticeable differences between centralized vs decentralized exchanges from a user’s perspective is the speed at which trades occur. Decentralized exchanges perform much slower than their centralized counterparts.
According to some estimates, trades placed on centralized exchanges take about 10 milliseconds on average to execute orders. That’s as good as happening instantly from the point of view of the person placing the trade.
Decentralized exchanges, however, can take anywhere from 15 to 60 seconds to match and fill an order. For investors who create a lot of buy and sell orders, that can add up to a good deal of sitting around waiting for trades to settle.
What Are the Biggest Advantages of Using a Decentralized Exchange?
The two main benefits of using a decentralized exchange might be increased security and anonymity. Some users prefer to keep their trades private and not have their personal information and wallet balances in the hands of a single entity.
Furthermore, the reduced risk of hacking eases both privacy and security concerns. Not only are funds thought to be safer, but the threat of a user’s info leaking and being used for identity theft or targeting for phishing attacks might be nonexistent, since DEX users might not even have to make an account to get started.
What Are the Biggest Advantages of Using a Centralized Exchange?
Centralized exchanges are easier to use (which may be especially important to those just getting started with crypto), have greater liquidity, and execute trades faster.
The Takeaway
Both centralized and decentralized exchanges have something to offer crypto investors. For investors who value usability, liquidity, and speed, a centralized exchange may be the way to go. For those who prioritize anonymity and security, a decentralized exchange is more likely to appeal.
Decentralized exchanges are a new concept and are still a long way from being widely used. Still, their volume has been rising steadily and could one day outpace that of centralized exchanges, especially as their usability improves.
Interested in buying and selling cryptocurrency? With SoFi Invest® crypto trading, investors can safely trade cryptocurrencies for investment through a single platform.
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 . 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) Cryptocurrency is offered 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, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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.
SOIN21132
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