What Are the 11 S&P 500 Sectors?

What Are the Different S&P 500 Sectors?

The S&P sectors represent the different categories that the index uses to sort the companies it follows. S&P refers to Standard & Poor; the S&P 500 index tracks the movements of 500 large-cap US companies. A number of mutual funds and exchange-traded funds (ETFs) use this index as a benchmark.

The Global Industry Classification System (GICS) has 11 stock market sectors in its taxonomy. It further breaks down these 11 sectors into 24 industry groups, 68 industries, and 157 sub-industries.

Understanding how the S&P sectors work and break down further can help both institutional and retail investors manage risk through different economic cycles by allocating their portfolio across multiple sectors. For example, cyclical stocks and cyclical sectors tend to fare well when the economy booms. During a recession, however, defensive stocks may outperform them. However, it’s also possible for all 11 sectors to trend in the same direction.

Examining the 11 Sectors of the S&P

Here’s a look at the S&P Sector List:

1. Technology

Technology represents the largest S&P sector. This sector includes companies involved in the development, manufacturing, or distribution of tech-related products and services. For example, companies in the technology sector may produce computer software programs or electronics hardware or research and develop of new technologies.

Tech stock investments are typically cyclical, in that they usually perform better in stronger economies. But during the coronavirus pandemic, many tech stocks saw a boost as demand for things like video-conferencing platforms and cloud storage increased as more companies adopted remote work.

The technology sector includes a number of growth stocks, which are companies that reinvest most or all of their profits in expansion versus paying dividends. Examples of the biggest tech stocks include Facebook (FB), Apple (AAPL), Microsoft (MSFT), Alphabet (Goog), and IBM (IBM).

2. Health Care

The next largest of the S&P sectors is health care. This sector includes pharmaceutical companies, companies that produce or distribute medical equipment, and supplies and companies that conduct health care-related research.

The health care sector also includes alternative health companies. For example, GW Pharmaceuticals is a drug developer focused on cannabis. The company develops medical marijuana products to treat various health conditions. As such, it’s generally considered part of the health care sector.

More traditional examples of healthcare sector companies include CVS (CVS), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), Thermo Fisher Scientific (TMO), and Regeneron (REGN). Health care stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.

3. Financials

The financials sector covers a variety of industries, including banking and investing. Banks, credit unions, mortgage companies, wealth management firms, credit card companies and insurance companies are all part of the financial sector.

Financial services companies are usually categorized as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or can not keep up with credit card payments. But this can be subjective, as mortgage companies may benefit during recessionary periods if lower interest rates spur home-buying activity.

Some of the biggest names in the financial sector include Visa (V), JPMorgan Chase (JPM), Bank of America (BAC), PayPal Holdings (PYPL), and Mastercard (MA).

4. Real Estate

Real estate is a relatively new addition to the S&P sectors list. This sector includes real estate investment trusts (REITs) as well as realtors, developers and property management companies. REITs invest in income-producing properties and pay 90% of profits out to investors as dividends.

Investing in real estate can be a defensive move as this sector is largely uncorrelated with stocks. So if stock prices fall, for example, investors may not see a correlating drop in real estate investments as property generally tends to appreciate over time.

Examples of real estate companies in the S&P 500 include: Digital Realty (DLR), American Tower (AMT), Prologis (PLD), Simon Property Group (SPG), and Boston Properties (BXP).

5. Energy

The energy sector includes companies that participate in the production and/or distribution of energy. That includes the oil and gas industry as well as companies connected to the development or distribution of renewable energy sources.

Energy stock investments can be more sensitive to economic movements and supply-demand trends compared to other sectors. For example, gas and oil prices declined in 2020 as stay at home orders kept drivers off the roads. Gas prices shot up in 2021, however, following the Colonial Pipeline hack which sparked fears of fuel shortages.

Some of the biggest energy sector companies include Exxon Mobil (XOM), Royal Dutch Shell (RDS.A), Chevron (CVX), Conocophillips (COP), and Halliburton (HAL).

6. Materials

The materials sector includes companies connected to the sourcing, processing or distribution of raw materials. That includes things like lumber, concrete, glass, and other building materials.

Materials is one of the cyclical S&P sectors, as it can be driven largely by supply and demand. During a housing boom, for example, the materials sector may benefit from increased demand for lumber, plywood and other construction materials.

Material stocks in the S&P 500 include Dupont (DD), Celanese (CE), Sherwin Williams (SHW), Air Products & Chemicals (APD), and Eastman Chemical (EMN).

7. Consumer Discretionary

The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers. Starbucks (SBUX), AMC (AMC), Best Buy (BBY), Home Depot (HD), and Nike (NKE) are examples of stocks that fit into the consumer discretionary sector.

Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. That’s why they’re considered cyclical in nature.

8. Industrials

The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. For example, Honeywell (HON), 3M (MMM), and Stanley Black & Decker are included in the industrials space alongside companies like Delta Airlines (DAL) and Boeing (BA).

Industrials are often considered to be cyclical stocks, again because of how they react to changes in supply and demand. The airline industry, for example, saw a steep decline in 2020 as air travel was curtailed due to the coronavirus pandemic.

9. Utilities

Utilities represent one of the core defensive S&P sectors. This sector includes companies that provide gas, electricity, water, and other utilities to households, businesses, farms, and other entities.

Since these are essentials that people typically can’t do without, they’re generally less sensitive to major shifts in the economic cycle. They also often pay dividends to their investors.

Examples of utilities stocks include AES (AES), UGI (UGI) and CenterPoint Energy (CNP), Duke Energy (DUK) and Dominion Energy (D).

10. Consumer Staples

Consumer staples stocks represent things consumers regularly spend money on. That includes groceries, household products and personal hygiene products. The consumer staples sector is also a defensive sector because even when the economy hits a rough spot, consumers will continue spending money on these things.

From an investment perspective, consumer staples stocks may not yield the same return profile as other sectors. But they can provide some stability in a portfolio when the market gets shaky.

Companies that are recognized as some of the top consumer staples stocks include General Mills (GIS), Coca-Cola (KO), Procter & Gamble (PG), Conagra Brands (CAG), and Costco Wholesale (COST).

11. Communications

Last but not least on the list of S&P sectors is communications. This sector spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also includes companies responsible for producing movies and television shows.

The communications sector can be hard to pin down in terms of whether it’s cyclical or defensive. In a down economy, for example, people may continue to spend money on phone and internet services but cut back on streaming services. So there’s an argument to be made that the communication sector is a little of both.

Companies that belong to this sector include Comcast (CMCSA), AT&T (ATT), Dish Network (DISH), Discovery Communications (DISC),and Activision Blizzard (ATVI).

The Takeaway

Knowing what the S&P sectors are and which types of industries or sub-industries they represent can help investors achieve diversification through different types of investments. While some financial experts liken the sectors to a pie, with 11 individual slices, it may be more helpful to think of them as a buffet from which investors can pick and choose. You can either purchase stocks within or across sectors, or look for funds that can provide that diversification for you.

If you’re ready to start building a well-rounded portfolio that includes a sampling of market sectors, it’s easy to open an account on the SoFi Invest online brokerage platform. SoFi Invest offers access to financial planners and educational resources that can help you make informed decisions.

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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.
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Contango Vs. Backwardation: What's the Difference?

Contango vs Backwardation: What’s the Difference?

Contango and backwardation are two ways to characterize and understand the state of the commodities or cryptocurrency futures markets, based on the relationship between spot and future prices.

In short, contango is a market in which futures trade at spot prices that are higher than the expected future spot price. But a contango market is not the same thing as a normal futures curve, though it is often mistaken for one. Normal backwardation, on the other hand, is a market where futures trade at a price that’s lower than the expected future spot price.

Understanding these concepts, and what they say about the futures curve, can make a big difference in an investing strategy.

If it sounds confusing, let’s start by defining terms.

Futures and Derivatives

Futures, Explained

Futures contracts, or futures, consist of legal agreements to buy or sell a security, commodity or asset at a set time in the future, for a predetermined price. One feature for both buyers and sellers of futures is that they can execute the contract no matter what current market price of the underlying asset when the contract expires.

Companies use futures contracts to hedge their risk of massive shifts in commodities prices, and investors who believe that the underlying security will go up or go down by a certain amount of time over a fixed period of time. The buyer of a futures contract enters a legal agreement to buy the underlying asset at the contract’s expiration date. The seller, on the other hand, agrees to deliver the underlying security at the agreed-upon price, when the contract expires.

Derivatives, Explained

A derivative refers to any financial security whose value rises and falls based on the value of another underlying asset, such as a security or commodity. That includes securities such as futures, options, and swaps. The most common assets upon which derivatives are based include securities like stocks and bonds, commodities like oil or other raw materials, but they may also reflect currencies and interest rates.

Recommended: Derivatives Trading 101: What are Derivatives and How Do They Work?

The Futures Curve

When writing futures contracts for a given asset, the futures seller will place different prices on that commodity at different points in the future. While the base price of a futures contract is determined by adding the cost of carrying the underlying asset to its spot price, it also includes an element of prediction. People buy more oil in the winter to buy their homes, for example, so oil investors may predict that oil will be in higher demand – and thus cost more – in January than it will in May.

By comparing the prices within futures contracts for the same underlying asset at different points in the future, the dollar amounts form a curve.

Normal Futures Curve vs Inverted Futures Curve

In a normal futures curve, the prices assigned to the underlying asset of futures contracts goes up over time. In the example of oil, a normal futures curve will be one in which a barrel of oil is priced at $50 for a contract expiring in 30 days; $55 for a contract expiring in 60 days; $60 for a contract expiring in 90 days, and $65 for a contract expiring in 120 days.

A normal futures curve embodies an expectation that the price of the asset underlying the futures contracts – such as oil, soybeans, a stock, or a bond – will rise over time. An inverted futures curve assumes just the opposite.

To go back to the example of oil, in an inverted futures curve, a barrel of oil is priced at $50 for a contract expiring in 30 days; $45 for a contract expiring in 60 days; $40 for a contract expiring in 90 days, and $35 for a contract expiring in 120 days.

The futures curve is used by investors, policymakers and corporate treasurers as an indicator of popular sentiment toward the underlying asset. And the prices of those futures contracts can represent the market’s combined best guess about the prices of those assets.

The spot price of the asset, on the other hand, the price at which it’s currently trading. It’s the relationship between the spot price and the prices on the futures curve that determine if the futures market is in a state of backwardation or contango.

What Is Backwardation?

When an asset is trading at spot prices that are higher than the prices of that asset as reflected in the futures contracts maturing in the coming months, it’s called backwardation. It can happen for a number of reasons, but most commonly occurs because of an unexpectedly higher demand for the underlying asset, especially in cases of a shortage in the spot market. Sometimes backwardation is caused by a manipulation of a commodity’s supply by a country or organization. Decisions by the Organization of Petroleum Exporting Countries (OPEC), for example, could create oil backwardation.

When backwardation occurs in futures markets, traders may try to make a profit by short-selling the underlying asset, while buying futures contracts that promise delivery at the lower prices. That trading drives the spot price down, until it matches the futures price.

What Is Contango?

Contango, on the other hand, is a situation where the spot price of an asset is lower than those offered in the futures contracts. In an oil contango market, for example, the spot price of the oil would rise to match that of the futures contracts at expiration. In contango, often associated with a normal futures curve, investors agree to pay more for a commodity in the future.

Backwardation vs Contango for Investors

Contango and backwardation can occur in any commodities market, including oil, precious metals, or agricultural products. Investors can find different opportunities and investment risks when investing in commodities in both backwardation and contango.

Recommended: Investing in Precious Metals

In backwardation, short-term traders who practice arbitrage can make money by short-selling the underlying assets, while buying futures contracts until the difference between the spot and futures prices disappears.

But investors can also lose money from backwardation in situations where the futures prices keep falling while the expected spot price remains the same. And investors hoping to benefit from backwardation caused by commodity shortage may wind up on the wrong side of their trades if new suppliers appear.

For investors, contango mostly poses a risk for investors who own commodity exchange-traded funds (ETFs) that invest in futures contracts. During periods of contango, investors can, however, avoid those losses by purchasing ETFs that hold the actual commodities themselves, rather than futures contracts.

The Takeaway

Contango and backwardation are two terms that describe the direction futures markets are headed. Knowing the difference between these two terms can help institutional and retail investors make the strategic choices when investing in a wide range of derivatives markets.

For investors looking to build a more straightforward portfolio without purchasing futures, a great way to get started investing is by opening an account on the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a management fee.

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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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Investing in the EV Market (Beyond Just Tesla)

How to Invest in EV Stocks

Electric vehicles (EV) have become increasingly popular since the first Tesla (TSLA) Roadster hit the highways in 2008, and as the technology matures, many investors see opportunity. The EV market has expanded well beyond Tesla to become a core strategy for automakers worldwide.

The explosion of the EVs has also created new downstream technologies, such as new batteries, charging stations, and other infrastructure.

Recommended: 7 Investment Opportunities in 2021

The History of Electric Vehicles

The concept of a battery-powered automobile goes back to the 1800s. But gasoline-powered cars, including the Ford (F) Model T gasoline-powered were cheaper, and won over drivers for all of the 20th century. The tide began to turn toward the end of the 20th century, as a result of heightened environmental concerns from both drivers and the federal government.

The government encouraged the development and purchase of EVs by instituting a series of generous tax breaks. The Energy Improvement and Extension Act of 2008 offered drivers tax credits for new plug-in electric vehicles. The American Clean Energy and Security Act of 2009 also had provisions calling for the improved infrastructure for EVs.

In 2011, President Barack Obama set a goal for the United States to have a million electric vehicles on the road by 2015, and pledged $2.4 billion in federal grants to pay for the development of new EVs and batteries. Subsequent tax breaks and grants over the next five years further increased the government’s investment in EVs, as well as the related technologies and infrastructure.

That windfall supported the research and development of companies like Tesla, which took in an estimated $2.4 billion via 109 separate government grants. Tesla used that money to create eye-popping, technologically advanced cars, as well as new battery technology that increased their horsepower and their range. Drivers clamored for the new vehicle, and Tesla’s stock boomed – going from $86 at the end of 2019 to $705 by the end of 2020.

This incredible success story has both institutional and retail investors looking for the next Tesla, as more drivers shift to EVs and companies dedicate resources to building them.

EV investment may be more of a long-term play, rather than a day trading strategy, since it can take up to five years for automakers to design, produce, and bring to market an electric vehicle. They’re also still generally more expensive than gasoline-powered vehicles and prices may need to fall further before widespread adoption occurs. Still, President Biden has announced a goal of having 50% of new vehicles electric-powered by 2030.

EV Stocks: Automakers Who Could Challenge Tesla

Tesla is a clear leader in the EV market. It has the brand name and the incredible sales figures, plus it only makes EVs. While Tesla made a large splash in the auto industry, that industry has massive resources with which to respond, and they’re spending billions in capital expenditures to catch up.

Here are just a few major competitors who could be strong EV investments in the future.

Volkswagen

The world’s largest automaker, Volkswagen (VLKAF), which also owns the Audi and Porsche brands, sold 231,600 EVs in 2020, an increase of 214% from the year before. It also sold more than 190,000 hybrid vehicles, which use both electricity and gasoline, up 175% from 2019. And Volkswagen has big plans for the EV and hybrid space, with €35 billion ($43 billion) devoted to developing and building new electric vehicles by 2025. It also announced plans to launch 70 new purely electric vehicles by 2030.

Ford

Ford recently announced plans to invest $22 billion in electric vehicles through 2025. That plan tops the $10 billion the auto giant already devoted to new EV development. It also invested $500 million in EV startup Rivian, with which it has plans to co-produce new vehicles. And it is aiming to launch an electric version of its flagship truck, the Ford F-150, in 2022.

General Motors

Big Detroit competitor GM (GM) is going all in on EVs, publicly announcing that it plans to stop producing gas and diesel light-duty vehicles by 2035. Not to be outdone by Ford, it also announced that it will invest $27 billion in EVs and autonomous vehicles by 2025.

Honda

In Japan, Honda Motor Co. (HMC) made headlines by becoming the first of Japan’s automakers to announce plans to entirely phase out sales of gasoline-powered cars, setting 2040 as its goal. The company is ramping up its EV production with an eye on China, where roughly 6% of the vehicles on the road are electric. It’s worth noting that the auto giant recently signed an agreement to use battery technology developed by GM in its vehicles.

Toyota

Toyota (TM) has been more cautious in its public statements about EVs, stating it is too early to focus only on electric options in its production plans. The company, whose Prius brought hybrids into many garages for the first time, still has not launched a fully-electric vehicle, but it does plan to introduce 15 fully electric vehicles by 2025. It is also working on other alternative technologies, developing fuel cell cars, like the Toyota Mirai, as well as hydrogen-combustion vehicles.

NIO

A pure-play EV manufacturer based in China, NIO (NIO) is small, but growing. The 5,291 vehicles it delivered in November of 2020, represented a 109% increase over the year before. Its unique battery technology has allowed it to create ancillary revenue streams around battery-swapping and battery-as-a-service businesses.

Apple

There are also persistent rumors that Apple (AAPL) has been working on an electric vehicle since 2014. While confirming the rumors, the company has stated that it won’t launch its first vehicle for another three to six years. But given the company’s deep pockets, brand reputation, and its history of game-changing design, it could make a giant splash when and if it does launch its first EV.

Recommended: Tips for Investing in Tech Stocks

Downstream Technologies

Electric car companies aren’t the only way to invest in EV technology. Having so many new EVs on the road also opens up new investment opportunities from EV battery stocks to charging stations. For one thing, drivers will have to charge their vehicles somewhere. And those investors will have some help from the federal government, with President Joseph Biden publicly stating he wants to devote more than $15 billion to build a national network of 500,000 charging stations.

Blink Charging

One charging station investment is Blink Charging (BLNK), which already has thousands of its EV chargers up and running across the United States. Its chargers are typically located near airports, hotels and healthcare facilities, where it rents space from the host locations.

ChargePoint

ChargePoint (CHPT) has been in business since 2007, and made a splash in 2017, when it took over General Electric’s 9,800 electric vehicle charging spots. It now manages more than 114,000 charging stations around the world. It also boasts a large patent portfolio.

Royal Dutch Shell

Oil company Royal Dutch Shell (RDS.A) may even deserve a look, as it plans to launch 500,000 EV charging stations at its gas stations over the next four years.

Recommended: How and Why to Invest in Oil

SPACs

Because it is such a fast-growing field, there are also a number of shell companies and special purpose acquisition companies (SPACs) devoted to companies that create and manage EV-charging technology.

Recommended: A Guide to High-Risk Stocks

The Takeaway

As the automotive industry transforms, there are a host of new opportunities for major companies, new startups – and also for investors. To consider investing in EV companies you’ll need to do your own research to decide which stocks fit into your portfolio strategy. You can also get exposure to electric vehicles without investing in individual stocks by investing in mutual funds or exchange-traded funds that focus on EVs.

Get started investing today by opening an account on the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a SoFi management fee.

Photo credit: iStock/EXTREME-PHOTOGRAPHER


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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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What is Buying Power? Definition & Formula

What Is Buying Power? Definition and Formula

Investors who trade securities through an online brokerage account or margin account may see references to buying power or excess equity when reviewing the amount of money they have available to purchase securities. So what is buying power in stocks, exactly?

In simple terms, it determines an investor’s ability to make trades at any given time. Understanding the differences in what it means to have more or less power to buy stocks, options or crypto can help with shaping investment decisions.

What Is Stock Buying Power?

Buying power, or excess equity, is a measure of how much capital an investor has available to trade stocks, options, cryptocurrency, and other securities.

There are different ways to measure buying power, depending on the type of account an investor has. Completing trades can reduce an investor’s ready capital while selling securities and depositing the cash into their trading account can increase it.

There’s no standard buying power definition; instead, it’s simply a way to gauge an investor’s ability to trade, based on the financial resources they have in their trading account.

Buying Power vs. Purchasing Power

This is not the same thing as purchasing power, however. Purchasing power refers to the amount of goods or services a given unit of currency can purchase, when factoring in inflation. Often purchasing power comes up during discussions of how inflation may affect a portfolio’s returns.

Recommended: How to Invest During Inflation

How Does Buying Power Work?

To understand how buying power works, it helps to understand when this term comes into play. The types of accounts that use or reference buying power include:

• Margin trading accounts

• Cash brokerage accounts

Individual Retirement Accounts (IRAs)

Margin trading involves using leverage, or borrowing cash, from a broker-dealer to purchase securities using the assets in a brokerage account as leverage or collateral. Trading on margin can increase an investor’s buying power above what they’d have in a cash account or IRA. (Cash accounts and IRAs don’t use margin or leverage.) While trading on margin can enhance risk, it can also double the amount of capital an investor has available to make trades with.

Pattern day trading can also increase buying power for margin investors who prefer active trading versus a buy-and-hold approach. The Financial Industry Regulatory Authority (FINRA) defines a pattern day trader as any investor who executes four or more day trades within five business days, provided that the number of day trades represents more than 6% of the investor’s total trades in the margin account for that same five-day period.

How to Calculate Buying Power?

The method of calculating buying power depends on the kind of account involved. With a brokerage account or IRA, this calculation is simple. An investor would simply add up the amount of cash they have available to trade. So if someone has $20,000 in cash in their brokerage account they’d have $20,000 in buying power.

With margin accounts, buying power is typically double the amount of equity they have in their accounts. So an investor who has $25,000 in a margin account would have $50,000 of stock buying power in that instance.

With pattern day trading, the buying power is four times the amount of equity. So if an investor has $50,000 in cash or equity with which to trade, they could have up to $200,000 in buying power using pattern day trading rules. It’s important to note that if an investor exceeds their day trading margin limits, their brokerage may issue a margin call.

Margin Calls

A margin call can happen if the value of securities in a margin account drops below a set level, as determined by the brokerage. When that occurs, the investor may need to deposit cash or other securities in their account or sell securities to make up a shortfall. The more leverage a brokerage allows, the more difficult it can be for an investor to fill the gap when there’s a margin call.

Recommended: What Is a Margin Call?

Buying Power Example

Assume that an investor has $10,000 in cash in a margin account. They want to use that $10,000 to purchase shares of stock. The stock has a 50% initial margin requirement.

The investor’s buying power calculation looks like this:

$10,000 in cash divided by 50% initial margin requirement = $20,000 in margin buying power

Now, assume that same investor has $100,000 in cash instead to purchase stocks with. Using the same initial margin requirement, the calculation looks like this:

$100,000 in cash divided by 50% initial margin requirement = $200,000 in margin buying power

It’s important to remember that the value of the stocks the investor owns can determine the value of their margin account. When the value of the account increases, that can lead to more gains for the investor but it can also increase their odds of a margin call.

How to Use Buying Power

If you’re interested in trading stocks, options or crypto investing, having more buying power can work in your favor. Trading on margin can allow you to invest larger amounts of money and it has the potential to magnify your investment returns.

Say you have only $5,000 to invest. You open a margin account and your brokerage allows an additional $5,000 in buying power for a combined total of $10,000. You use this $10,000 to purchase 500 shares of stock which are trading at $20 each.

The stock’s price doubles to $40 per share. Now your shares are worth $20,000. You decide to sell, paying back the $5,000 margin loan to your broker. You also pay $500 in interest for the loan. That leaves you with $14,500 in profit.

Now, say you used $5,000 to buy 250 shares of that same stock. Once the stock’s price doubles to $40, you sell them and rake in a $10,000 profit. You’re still coming out ahead but trading on margin would have given you more buying power and thus more profits.

When using buying power to your advantage, you do have to consider the risks as well. Just as margin trading can increase your profits, it can also increase losses if the securities you purchase decline in value. In the event of a margin call, you’d have to liquidate some of your holdings or deposit extra cash to cover the difference.

The Takeaway

Understanding how buying power works matters, especially if you’re a day trader or you’re trading on margin. And even if you’re a beginning investor, it’s still important to know what this means when it comes to your first brokerage account or IRA.

If you’re interested in trading stocks online and making the most of your buying power, you can get started on the SoFi Invest® brokerage platform. While the platform does not allow you to trade on margin, you can build a portfolio composed of stocks, exchange-traded funds and cryptocurrency.

Photo credit: iStock/solidcolours


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. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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Understanding Market Breadth

What Is Market Breadth?

Market breadth indicators are mathematical formulas that show how many stocks in a particular market or stock index are increasing in price compared to how many are declining in price. It’s useful for understanding the current and predicted movements of stock indices and analyzing stocks and understanding how broad-based a rally or pullback might be.

Determining the breadth of the market requires using a set of technical indicators to assess the price and movement of the index. Stock indices are groups of stocks and securities, grouped based on an industry, region, company size, or other factors.

What Is Breadth Ratio?

If the majority of stocks in an index are increasing in value, this is called positive market breadth, and the index is said to be in confirmation in this circumstance. This is a bullish indicator that shows that the overall market is in a rising trend and is likely to continue going up in value.

The opposite also holds true. If the majority of stocks are decreasing in value, this is referred to as negative market breadth. This indicates that there is a bearish sentiment and the index may decrease in value.

If the index is rising in value but the market breadth indicators show a negative market breadth, the index is said to be in divergence. And vice versa.

Since market breadth can show the direction of the overall market, traders use it to assess the health of the index as well as the broader market. However, market breadth indicators aren’t always completely accurate, and they can’t be used as predictions of market changes or price reversals.

Sometimes market breadth indicators signal a market movement too early for investors to make use of it. Market breadth is one of the inputs used to generate CNN’s Fear and Greed Index.

How is Market Breadth Used by Investors?

One way institutional and retail investors use market breadth is to reveal underlying market conditions that may not be immediately apparent from looking at the current price movement of an index on a chart. If a few shares in an index have large price movements up or down, this can affect the average and shift the entire index, even if the majority of stocks in the index are going in the opposite direction. The direction of an index is not always an accurate representation of the performance of individual securities that are in the index.

Market breadth can act as a warning to traders to show them potential future price movements of an index, or can show how many stocks are actually moving following a specific market event or trend. Given its limitations, most traders use market breadth in conjunction with other tools and indicators that provide a comprehensive picture of market conditions and the health of the index.

Recommended: 5 Stock Trend Indicators to Know

Types of Market Breadth Indicators

Market breadth indicators are mathematical formulas used to measure how many stocks are rising and falling within an index, as well as their trading volume. Investors use them to discover market sentiment, predict whether an index is likely to rise or fall in the future, and to assess the strength of an upward or downward price trend.

Traders use these indicators along with other types of technical analysis tools such as looking at chart patterns. The difference between breadth indicators and other technical indicators is that technical indicators more broadly signal support and resistance, look for profitable trade signals, and assess trading volume and asset prices. Breadth indicators look specifically at the movements and volume of a stock index.

Recommended: What Is Technical Analysis? A Beginner’s Guide

There are several market breadth indicators used to assess an index. Each indicator shows different information. Together they can confirm stock index price trends, show a picture of index health, and help predict future stock price movements such as reversals. Some market breadth indicators add or subtract each new day’s value from the previous day, making them cumulative calculations, whereas others use each period of time as a separate data point.

Some assess an entire index while others assess individual stocks within an index. Different breadth indicators may be used for different purposes depending on what a trader wants to find out and how in depth they want to go into technical analysis of stocks and indices.

Popular indicators include:

Volume of Trade

One technical indicator often used with market breadth is volume of trade. Volume of trade is the number of shares of a particular stock within an index traded within a particular period of time. Generally, traders look at a period of 52 weeks, or one year. It’s important to look at trading volume of individual stocks because if a stock has a high volume of trade then its price movements have a large impact on the overall index.

Advance/Decline Line

Another popular breadth indicator is the Advance/Decline Line, which adds or subtracts net advances of a new period from those of a previous period. Net advances are the number of increasing or decreasing stocks. This gives a cumulative picture of the direction of the index, showing the investor sentiment for all stocks included in the index.

On Balance Volume (OBV)

To find this indicator, traders add or subtract trading volume based on an index closing price.

McClellan Summation Index

This market breadth indicator creates a running total based on the McClellan Oscillator, with the index going up when the oscillator is positive and down when it is negative.

Arms Index (TRIN)

Investors calculate this indicator by dividing the ratio between increasing and declining stocks by the ratio of increasing to decreasing trade volume.

Chaikin Oscillator

The oscillator shifts with volume and price movements.

Up/Down Volume Ratio

To find this ratio, traders divide rising stock volume by decreasing stock volume.

Up/Down Volume Spread

Traders calculate this indicator by subtracting down volume from up volume.

Tick Index

This indicator looks at how many stocks are trading on an uptick versus how many are trading on a downtick.

New Highs-Lows Index

This indicator looks at a one-year period and compares the number of stocks with a 52-week high to the number with a 52-week low. If more than 50% of stocks have a high or a low, this can be an indication that the index is moving in a bullish or bearish direction.

Limitations and Downsides of Market Breadth

Although market breadth indicators are a valuable tool for traders, they do have some limitations. They can help investors decide what trades to make, but they do not serve as accurate predictions of the future. They don’t always show upcoming reversals or price confirmations, and are just one tool in analyzing a stock.

Every trading situation is different, so the same indicators can’t be equally useful in all situations. Also, some indicators might show a large or small movement that isn’t reflected in the index price. For instance, if the trading volume changes a lot during a trading day but the price doesn’t change very much, a volume indicator will show a large shift that isn’t an accurate representation of movements in the market.

The Takeaway

Market breadth is a useful technical analysis tool for helping traders understand index markets. It can give them a sense of whether recent market movements reflect broad-based trends or whether large movements by a few stocks are skewing the overall numbers.

If you’re interested in starting to trade and build a portfolio, SoFi Invest® brokerage platform is a great trading app to use. The investment platform lets you research, track, buy and sell stocks with just a few clicks on your phone. You can connect all your banking and investment accounts to easily see your financial information in one simple dashboard.

The platform offers both active and automated investing. With active investing, you can pick and choose each stock or asset you want to buy. Using automated investing, you can choose from groups of pre-selected stocks and assets. If you need help getting started, SoFi has a team of professional financial advisors available to answer your questions.

Photo credit: iStock/FreshSplash


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.
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