Investing Archives | Page 132 of 221

Mar

2023

Guide to Aave Crypto

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Aave is a cryptocurrency platform that gives users and participants the ability to borrow and lend crypto without a middleman. In effect, it’s a sort of lending system in the crypto space that let’s users lend and borrow, and earn interest as a result.

The platform also has its own crypto tokens, and is a sort of Web3 version of more typical financial lending and flash loan systems. If you’re interested in the ability to lend out your crypto holdings and potentially beef up your returns for doing so, understanding what Aave is and how it works may be of use.

What Is Aave Crypto?

Aave’s definition has changed over time, as the company has evolved. On a technical level, Aave is a decentralized finance (DeFi) protocol that enables the borrowing and lending of cryptocurrency, including so-called flash loans. Flash loans are considered the first uncollateralized loan option in the DeFi space.

Aave is built on the Ethereum platform, and it’s considered one of the biggest DeFi projects, and one of the top that focus on lending and borrowing cryptocurrency through a pooled liquidity system. Lenders can earn relatively low-risk, passive income from interest paid on loans, without having to engage with third-parties or middlemen.

What Does Aave Mean?

Fun fact: the word “aave” means ghost in Finnish. As the company evolved (more on that below), its initial identity as ETHLand was renamed Aave, as a reflection of the organization’s imaginative, evolving nature.

How Does Aave Work?

Aave’s DeFi protocol allows users to provide loans using a system that is, in many ways, the inverse of how a bank would issue a loan.

First, there is no financial institution, and no intermediary that oversees or grants loan requests based on creditworthiness. Instead, Aave is a “trustless” network that utilizes smart contracts to execute the loans, removing the need for middlemen.

Where a bank would grant a loan in dollars (or another fiat currency), Aave lends cryptocurrency.

There are no widely accepted credit checks or scores in the DeFi space, thus, users must post collateral in order to get a loan on Aave.

» Looking for more guides? Check out our glossary of crypto coins.

What Is a Flash Loan?

A flash loan began as a unique feature on the Aave platform (other platforms now offer flash loans as well). They are uncollateralized products that are possible thanks to the way the Ethereum blockchain network functions — Aave is built on the Ethereum blockchain network.

Flash loans are automated, rapidly executed loans that must be repaid within one Ethereum transaction. If the principal and interest are not repaid in that time, the loan is effectively reversed, the transaction removed from the blockchain as if it had never occurred.

Liquidation

Users who deposit or pledge their crypto into liquidity pools (see below) are adding liquidity to the overall network. That means they’re increasing the amount of crypto that could potentially be borrowed. Collateral is important for crypto loans, as most crypto loans (except for flash loans) often need to be overcollateralized.

As such, crypto loans made on Aave that drop below a certain loan-to-value ratio may initiate an automatic selling process of the underlying collateral in order to pay back the loan.

In many ways, this is similar to a margin call, which can occur in margin accounts within a brokerage.

Liquidity Pools

Whereas a traditional bank would secure a loan using physical collateral (e.g. a home is the collateral for a mortgage), Aave relies on liquidity pools. In a liquidity pool, users deposit crypto funds they’re willing to lend, which is combined with other investors’ crypto. This increases the total potential amount of crypto that can be loaned through the network.

Borrowers can then use these pools to take out a loan. Borrowers pay interest on the funds they borrow; lenders receive Aave tokens (aTokens) that entitle them to a cut of the interest earned on the money they lend, a process that’s called yield farming.

How Does Aave Pay Interest?

Lenders who earn interest receive it in the form of whatever type of crypto they deposited into liquidity pools. There isn’t a limit to how much lenders can supply to liquidity pools, and how much lenders earn in interest varies. Withdrawing interest earnings is easy — it’s as simple as using the Aave user dashboard to initiate a transaction.

What Tokens Does Aave Use?

Aave issues two different tokens.

The first type are called aTokens, which are given to lenders so they can receive interest on their deposits. The second type are called AAVE tokens, the native token of Aave. AAVE performs more than one function and works like several other types of cryptocurrency, being both a governance token and an exchange token that offers users discounts on fees within the Aave protocol.

💡 Recommended: What Is a Governance Token and How Are They Used?

Aave is an open-source protocol, meaning anyone can see and verify how it works. As noted, the platform runs on the Ethereum blockchain. Unlike Bitcoin mining, which uses a highly complex and resource-intensive proof-of-work process, AAVE coins are based on the ERC-20 standard. A collection of smart contracts provides decentralized financial options to users.

AAVE Coin Price

Aave is one of the largest DeFi platforms, and as of February 20, 2023, AAVE crypto was the 47th largest cryptocurrency on the market with a market cap of nearly $1.3 billion. The price of one AAVE coin was around $91.That’s down considerably from a peak of more than $629 in May 2021.

There are 14 million total AAVE tokens in circulation — 88% of the eventual total 16 million.

History of Aave

Aave launched in September of 2017, and was originally known as ETHlend. Aave was created by Stani Kulechov, who, at the time, was not happy with the fact that there were relatively few lending applications built on Ethereum.

In September 2018, the protocol was rebranded and became Aave.

An initial coin offering (ICO) for AAVE was held in November 2017, and $16.2 million was raised in a sale for one billion AAVE tokens (then called LEND), and an additional 300,000 for investors. In 2020, LEND was replaced with AAVE coins, with every 100 LEND being converted to 1 AAVE, resulting in 16 million coins extant.

What Can You Use AAVE Crypto For?

AAVE is designed to be used on the Aave platform, similar to how ETH is designed to be used on Ethereum, and can provide several benefits to its holders.

Holding AAVE tokens typically gives users discounted trading fees on the platform. Borrowers who offer up AAVE tokens as collateral for their loans may also get discounts on fees. These borrowers also gain the ability to take out larger loans. On the other side, users can lend AAVE and collect interest.

Finally, AAVE crypto borrowers can take out fee-free loans when those loans are denominated in the token.

Similar to some other DeFi tokens, like Uniswap (UNI), the AAVE coin is also a governance token. Holding AAVE crypto gives holders the ability to vote on upcoming proposed changes to the Aave protocol.

Traders can also speculate on the price of AAVE, hoping to buy low and sell at a higher price later. Short-term traders are required to pay cryptocurrency taxes when they sell coins, however, which is important to keep in mind.

There are more than 30 different types of crypto users can lend or borrow on the Aave platform: e.g. ETH (the native token of Ethereum), DAI, and stablecoins like Tether or USDC, among others. Note, too, that Aave has also started deploying GHO, its own decentralized stablecoin, into the crypto space, too.

Should You Invest in AAVE?

Investors who believe that decentralized lending will continue growing may find AAVE crypto appealing. But whether or not you should invest in AAVE, or any other cryptocurrency, will depend on your specific investing goals and financial situation — there is no right or wrong answer. If you’re looking to increase the level of crypto diversification in your portfolio, however, it may be worth a look.

To determine whether investing in AAVE is wise, consider your risk tolerance, time horizon, and how crypto fits into your overall investing strategy. It may be worth it to consult a financial professional for additional insight, and to review Aave’s documentation to make sure you understand the project top to bottom.

Be aware, though, that AAVE, like any other crypto, is far from a safe investment. Cryptos have their own unique risks, and it may not be in every investor’s wheelhouse to dip into the crypto space.

Pros and Cons of Aave

Investing in Aave has its pros and cons, too.

Owning AAVE gives users special privileges on the Aave platform, as noted above, including discounts on transactions and fees. And because Aave is one of the biggest DeFi lenders, AAVE has high liquidity.

In terms of stability, longevity, and commitment to innovation, the Aave platform continues to be one of the largest in the DeFi space.

That said, investing in crypto requires a deep familiarity with how various platforms, tokens, and coins work, and the potential risks involved. Unlike the markets for stocks and bonds or even ETFs, which are long established and highly regulated, the crypto markets are relatively new, largely unregulated, and rapidly evolving. While this presents many possible opportunities for investors and traders, there are no guarantees of positive outcomes, given the volatility of this space.

Pros and Cons of Aave
Pros	Cons
AAVE holders get discounted trading fees	Volatile value
Ability to earn interest lending crypto	AAVE only has utility on the Aave platform
High liquidity	Unregulated, evolving market

AAVE Fees to Be Aware of

There are fees associated with using the Aave platform. For one, there are transaction fees for using the Ethereum Blockchain, generally called “gas fees,” which are used to facilitate transactions on the network. There are also fees associated with borrowing crypto on the Aave network, as mentioned, which are partially paid to lenders or those who contribute to liquidity pools.

How to Buy AAVE Cryptocurrency

Buying AAVE is similar to most other cryptocurrencies. Here are the basic steps that a user needs to know.

1. The first thing required is an account on a crypto exchange. Make sure the exchange provides trading for the AAVE cryptocurrency.

2. After creating an account, a user can then deposit either some Bitcoin, dollars (or other local fiat currency), or a stablecoin, depending on what trading pairs the exchange currently trades.

Buying crypto directly with a credit card might also be an option, but doing so often involves higher fees (not only might the exchange charge additional fees, but credit cards often treat crypto purchases as a cash advance, which comes with even more fees).

3. At this point, a user can buy AAVE. Simply select the trading pair that includes AAVE and the currency deposited during step number two.

For example, if a user had bitcoin and wanted to buy AAVE, they would select the pair called “BTC/AAVE.” If they had dollars, it might be “USD/AAVE.” For a stablecoin like USDC, it might be “USDC/AAVE.” Enter a buy order for the desired amount of coins at a desired price. Alternatively, on exchanges that include order books in the user interface (like Binance), simply select the top sell order and buy from it.

Alternatively, investors could use a decentralized exchange (DEX) to acquire AAVE. Using a DEX generally requires only a crypto wallet, of which there are many to choose from. Users don’t have to create an account and can simply swap coins on the platform.

After buying AAVE tokens, some users may want to consider moving their crypto into a crypto wallet that supports AAVE. This method of crypto storage provides extra security, as the coins can be taken offline and put into cold storage where it’s less likely that hackers might access them.

FAQ

Is Aave crypto a good investment?

It’s impossible to say that any cryptocurrency is a “good” investment, given the risks involved with investing in crypto. But as with any investment, there is a chance that it could garner big returns for investors, and Aave also allows for the lending of crypto, which can help earn additional returns.

Why is Aave crypto so popular?

Aave gained popularity due to its flash loans, and is now one of the larger DeFi lending platforms on the market. The ability to lend and borrow without a middleman has advantages for users, and the ability to earn interest or staking rewards may be particularly attractive to investors.

Does Aave gain value?

Aave has gained value in the past, and likely will in the future. Cryptocurrencies are volatile investments, though, and gain and lose value often — as such, it’s likely that Aave will gain value at some point in the future.

Photo credit: iStock/RgStudio

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

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Mar

2023

Bull Markets, Explained

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

A bull market occurs when a broad market index rises at least 20% over two months or more. Bull markets signal higher levels of investor confidence and optimism about the future of the market. They are generally a sign of a strong, healthy economy.

The opposite scenario, in which stock prices fall by 20% over an extended period, is known as a bear market.

If you’re investing in the stock market, it’s important to know the nature of bull markets and their potential impact on your returns.

What Is a Bull Market?

When asset prices generally rise over time, the upward trend is known as a bull market. The traditional benchmark for identifying a bull market is an increase of 20% or more in a market index over a two-month period. For example, stock experts might look closely at the Dow Jones Industrial Average (DJIA) or the S&P 500 to determine whether a bull market exists.

Bull markets can imply that the economy is in good shape, with unemployment low and new jobs being created. Investors tend to view a bull market favorably because it suggests that stock prices may continue to rise over the long term. People who buy stocks early in a bull market may benefit later from the investments’ significant price appreciation.

Why Is It Called a Bull Market?

Although there’s no single explanation for how bull and bear markets got their names, people often suggest that the descriptive names are meant to reflect the nature of each animal.

Bulls, for instance, have a reputation for charging or attacking. In a bull market, eager investors may rush in to buy stocks in the hope of capitalizing on future price increases.

Bears, on the other hand, are often seen as being defensive animals that only attack when threatened. In a bear market, it’s common to see investors pull back out of caution and sell off stocks they own or avoid buying new ones. Those behaviors are often driven by fear and uncertainty about the market trending down.

Characteristics of a Bull Market

Identifying when a bull market begins or ends is sometimes challenging, given the nature of stock prices and how rapidly they can move up or down. Generally, there are three indicators that stock experts use to determine whether a bull market exists.

• Stock prices, or prices for a broad market index, have increased by 20% or more over a set period of time, typically two months or longer.

• Investor confidence is high and those buying into the market have an optimistic outlook toward the future.

• Overall economic conditions are largely positive, with low unemployment rates and, ideally, low inflation rates as well.

These three signs usually indicate that the market is on a sustained upswing. Other indications of a bull market can include strong earnings reports and marked increases in investors’ dividends.

What Causes a Bull Market?

Bull markets are usually driven by changing undercurrents in the economy. They tend to reflect the business cycle.

The business cycle experiences periods of expansion, followed by periods of contraction. Real gross domestic product is a commonly used metric for determining which of four phases the economy is in.

• Expansion. During the expansion period, the economy is growing and domestic production is up. There may be a bull market for stocks during this period.

• Peak. A peak occurs when the economy exhausts its ability to grow. At this stage, the bull market typically hits its highest levels before entering the next phase.

• Contraction. During the contraction period, the economy shrinks. Companies may cut back on spending or hiring to save money and stocks may enter bear market territory.

• Trough. The trough is the lowest point in the business cycle. It’s followed by the beginning of the next expansion phase, which can open the door to a new bull market.

The business cycle also influences when bear markets occur. In addition, there are times when a bull or bear market is triggered by something other than the business cycle. For example, in early 2020 there was a short-lived bear market caused by uncertainty over the emerging COVID-19 pandemic.

Example of a Bull Market

The bull market that began in 2009 following the shock of the financial crisis is the longest on record, lasting until the bear market that occurred in early 2020.

Several factors contributed to the sustained length of the bull market, including strategic moves to manage monetary policy on the part of the Federal Reserve, and tax breaks delivered by the 2017 Tax Cuts and Jobs Act.

Many stockholders benefited from steady dividend payouts, and the real estate market also delivered a strong performance during that time.

Bull Market vs Bear Market

Bull markets and bear markets are opposites in terms of how participants behave and what the outcomes can mean for investors. Bull markets typically involve upward movement of stock prices while bear markets indicate a downturn.

In a bull market, investors tend to take a positive view of the market. Bear markets, on the other hand, can trigger pessimism, fear, or other negative feelings among investors.

Bull markets are usually marked by thriving economies and high levels of corporate growth. Bear markets point toward a slowing economy and limited growth. In extreme cases, a bear market could suggest that a recession may be on the horizon (although a recession can offer certain opportunities as well).

Investing Tips During a Bull Market

Investing in a bull market isn’t one-size-fits-all, so your personal approach may be different from other investors’. There are, however, a few overall strategies that could help you to maximize gains while taking on a level of risk you’re comfortable with.

Keep Your Goals In Sight

It’s easy to be tempted to follow the crowd when investing in a bull market or a bear market, but it’s important to stay focused on your individual goals, especially if you’re a beginning investor. If you already have a financial plan in place, that plan can act as a guide for how to choose the right asset allocation during a bull market.

Diversify Your Portfolio

Diversification is an important tool for managing risk in a portfolio. When you’re diversified across different asset classes or industries, it helps to limit your exposure to certain kinds of investment risk. If one investment begins to decline in value, your other investments can help to bolster your portfolio.

A higher allocation to stocks may be optimal if stock prices are rising, but you may want to balance those out with less risky investments, like bonds.

If you’re investing in mutual funds or exchange-traded funds (ETFs), consider what assets each one holds to avoid becoming overweighted in one particular industry or sector.

Go Long in Your Positions

Going long simply means adopting a buy-and-hold approach when investing in a bull market. The end goal is to buy stocks at a low price, then sell them later for a higher price to maximize returns. The key is knowing how to identify the impending end of a bull market so that you can sell before prices drop.

The Takeaway

Bull markets, in which asset prices rise and investors feel optimistic, are a natural part of the market cycle. A bull market begins when a market index rises 20% or more over a two-month period, and it can last months or years. Generally, during a bull market, maintaining a diverse portfolio and a clear idea of your goals can help you manage your investments prudently.

If you’re not investing yet, it’s never been easier to get started. With SoFi, you can open an online investment account and start building a portfolio. You can choose between self-directed trading or automated trading as you begin your journey to growing wealth. SoFi doesn’t charge management fees, and investors can choose between stocks, ETFs, and more.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is a bull market a good market?

A bull market usually signifies that the market is strong. A market where stock prices are generally increasing can offer an opportunity to buy and hold stocks — if you can purchase them before prices rise too high.

How long can a bull market last?

Bull markets have no set duration; they can last months or even years. When a bull market occurs, it typically sticks around for a longer period of time than bear markets do.

Should you sell stocks in a bull market?

Selling stocks in a bull market could make sense if you’re able to sell them for substantially more than you paid for them. Essentially, it all comes down to timing and what makes sense for your individual goals and tolerance for risk.

Photo credit: iStock/GOCMEN

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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

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.

SOIN0322046

Mar

2023

What Is Broker Call, or Call Money Rate?

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

The broker’s call — also called “call money rate” or “call loan rate” — refers to the interest rate that brokerage firms pay to banks when they borrow money.

Brokerage firms borrow money from banks in the form of call loans in order to offer loans to traders and investors with margin accounts. As such, the interest rate that brokerages pay banks is what’s referred to as the broker’s call, or call money rate.

Banks can call those loans back from brokerages at any time (hence the name “call loans”), which may cause brokerages to call the money they lent to traders or investors (in the form of margin). That’s one example of what’s referred to as a “margin call.”

Broker Call Rate Definition

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders and investors to pursue margin trades. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

In effect, banks lend money to brokerages, and the brokerages lend money to investors — each loan carries a different rate. The broker call rate, again, is the interest rate that the brokerages pay to the banks.

Investors and traders that are using margin to trade will be on the hook for interest payments to the brokerages, and the applicable interest rate for those traders are called margin rates.

But, in terms of a broker call rate, that is only referring to the interest rates that brokerages pay to banks, not the margin rates traders pay to brokerages for their margin accounts.

In addition, although the broker call rate is quoted as an annual rate, these loans are typically for much shorter periods of time. As such, the fees are assessed daily. If the annual rate is 5%, the overnight rate is 5% divided by 365 days or roughly 0.014% per day.

Margin rates, or the rates charged to traders, would be higher.

Explaining Call Money Rate

Although the terms sound quite different, the broker call rate and the call money rate are essentially the same thing: it’s the interest rate that brokers pay to banks for borrowing money. That typically comprises short-term loans that the brokers then turn around and lend to traders or investors for use in margin accounts.

Brokerages will typically include a service charge, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, traders or investors using margin accounts pay a premium, plus interest, to trade with margin loans.

As an investor is deemed capable of borrowing more money, the gap between the broker call rate and the margin rate narrows.

Brokerages drive extra revenue by exploiting the difference in interest rates, just as investors do the same via interest rate options.

The Use of the Term ‘Call’

A quick side note: You may have noticed that the term “call” is a common financial term with various meanings, including:

1. A brokerage issuing a “margin call” requiring a borrower to increase the cash in their account or sell assets to raise cash for their account.

2. A lender “calling a loan” on a borrower, requiring them to repay their debt.

3. Yield to call is another example of the word that in this phrase refers to bonds.

What Is a Call in Options Trading?

A “call” is also a common type of option (the two main types of options are puts and calls), but the sense of the word here is quite different. A call option is a derivative contract that gives investors the right, but not the obligation, to buy a certain number of shares of an underlying asset.

While options trading and margin trading are similar in that they use leverage, margin trading specifically involves borrowed funds. A margin account is not required for options trading.

How Is the Broker Call Rate Calculated?

The broker call rate in the U.S. fluctuates continuously, but generally increases along with interest rates across the board due to the Federal Reserve lifting benchmark rates. Conversely, as the Federal Reserve cuts rates, the broker call rate falls as well.

The broker call rate and the Federal Reserve funds rates are tightly linked, but they are not required to be the same.

It’s also important to know that the broker call rate fluctuates on a daily basis, much like other interest rates. With that in mind, the broker call rate’s calculation is less of a calculation, and more based on a benchmark, such as the London InterBank Offered Rate, or LIBOR rate.

LIBOR serves as a benchmark interest rate that lenders around the world use when they lend to another financial institution on a short-term basis. As such, it makes sense that it would serve as the benchmark for the broker call rate.

But LIBOR is being phased out as of the beginning of 2022, and is being replaced in most instances by the Secured Overnight Financing Rate (SOFR). The transition won’t fully replace LIBOR until 2023, however.

How Does It Affect Margin Traders?

Margin traders utilize leverage to attempt to supercharge their returns. That is, they’re borrowing more money than they actually have in order to make bigger trades. This increases their investing risk, but can also increase their gains.

And, as discussed, it’s pretty obvious how the broker call rate can affect margin traders. Since brokerages need to borrow money from banks, and pay the associated costs for doing so (in the form of interest), they need to turn a profit through their own lending activities. Lending to margin traders, by charging interest plus a service fee or other related cost, helps them cover those costs.

So, the higher the broker call rate, the more interest brokerages need to pay banks in interest charges. That gets passed down to margin traders, who, in turn, end up paying more in interest charges to brokerages when they use margin. This is one of the drawbacks when using a cash account versus a margin account — there are additional costs to consider for using margin, which can eat into returns.

Broker Call Rate Example

Here’s an example of how the broker’s call rate may come into play in the real world:

Brokerage X needs to offer margin funds for its clients with margin accounts, but doesn’t have the money to cover its needs. So, it borrows the money from Bank Y at a predetermined broker call rate. Bank Y decides that the rate will be the current LIBOR rate, plus 0.1%. So, if the LIBOR rate is 3%, for example, the broker call rate is 3.1%.

Brokerage X then uses the borrowed funds to offer margin funds to its clients, for which it charges a margin rate of 4%, plus a $10 service fee. By doing so, Brokerage X drives a little extra revenue through its lending activities, and when the traders pay the margin funds back, it can return them to Bank Y, paying the 3.1% broker call rate for the privilege of borrowing.

Current Call Money Rate

The current call money rate is published daily by the Wall Street Journal, and others. As it fluctuates often, margin traders, or others who may be subject to those fluctuations, can or should make a habit of looking at the current rate in the event that it changes their strategy.

Due to the Federal Reserve raising benchmark rates in an effort to blunt high inflation, the call money rate has seen rapid increases throughout 2022. As recently as June 2021, for instance, the call money rate was only 2%.

Margin Trading With SoFi

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

Brokerages typically charge a fee, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, investors using margin accounts pay interest to trade stocks with margin loans — plus a little extra.

Leveraged trades are complicated and can be risky. While using borrowed money lets traders place bigger bets, and possibly see bigger gains, they also risk steep losses.

If you’re interested in opening a margin account, you can start by opening a new investing account with SoFi. From there you can apply for a margin loan and start trading. SoFi doesn’t charge commission, and SoFi members have access to complimentary financial advice from professionals.

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

Who decides the call rate for margin trading?

A brokerage ultimately decides the costs associated with margin trading for investors. But as far as what determines the broker call rate, it goes back to the rate as determined by the prevailing benchmark interest rate, such as LIBOR, or the Secured Overnight Financing Rate (SOFR), which is taking precedence as LIBOR is phased out.

What is the overnight call rate?

The overnight call rate refers to the interest rate that banks use when lending or borrowing overnight. Again, since the call money rate is constantly fluctuating, the overnight call rate may or may not be different from the call money rate during normal trading hours.

Photo credit: iStock/YakobchukOlena

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.
SOIN0522013

Mar

2023

Guide to Speculative Investments

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

A speculative investment is when an investor hopes to profit from a rapid change in the value of an asset, often one that’s considered non-productive.

Many speculative investments are short-term, and they can be made in markets such as foreign currencies, collectives, fine art, and margin trading of stocks.

Typically, speculative investments are high-risk positions in assets with frequent price fluctuations, providing both the opportunity to profit and the risk of loss.

What Are Speculative Investments?

In general, if an investor is investing in an asset with the belief that its value will increase within a short amount of time, and they will be able to sell it for more than they bought it for, that is a speculative investment.

The types of investments that fall into the speculative investing category are often referred to as non-productive assets, because they don’t produce any income while they are held by an investor, such as dividends or rental income.

The way investors make money on them is by speculating that someone else will buy the asset for more than they did at some point in the future. There is some underlying agreement in the markets that an asset has value despite its lack of production. For instance, gold and precious metals are considered valuable, and investors buy them predicting that their value will increase.

Conversely, non-speculative investments tend to be part of long-term investment strategies. These are assets that may increase in value over a longer period of time, and may also provide income while the investor owns them.

Examples of non-speculative investments can include real estate and owning part of a business, but even real estate and stock investments can be considered speculative in certain cases.

How Does Speculation Work?

As noted above, speculation is when investors anticipate that their purchase will go up in value and they will be able to sell it for a profit. Investors would be unlikely to take part in speculative investments unless there was a significant chance that they might see a significant gain, despite the risk exposure.

Investors typically consider many factors, such as a news event, election cycle, interest rate changes, or a new regulation. Any of these could spark a price change in a speculative asset.

If an investor has several speculative assets in a portfolio, they might hope that just one or two of them earn a huge profit, making up for any losses in other areas. Speculative investing poses a high risk for novice investors.

Speculation looks different depending on the market. For instance, speculation in the real estate market might look like an investor buying multiple properties with small down payments with a plan to quickly resell them for a profit.

Speculation can also look like betting against the market trend through short selling, a strategy where investors to bet that a particular stock’s future price will be lower than its current price. It’s the opposite of going long a stock, where an investor buys shares with the expectation that the stock price will increase.

4 Examples of Speculative Investments

Below are four examples of common speculative investments.

1. Foreign Currencies

One type of speculative investment is foreign currencies (forex). The forex market is the largest in the world. Around $6.6 trillion is transacted each day in the global foreign currency markets.

Forex trading involves buying and selling currency pairs such as EUR/USD. As the value of one currency goes down, the other goes up. Traders speculate on which way the relationship will go and hope to profit off the change in value.

Forex markets are open 24 hours a day, and investors can execute trades as quickly as seconds or minutes, making it a popular forum for speculation.

2. Precious Metals

Precious metals such as gold, silver, copper, and others are traded as hard commodities (versus soft commodities, like agricultural products). These are speculative investments that fluctuate in price constantly based on a variety of factors, including inflation, supply and demand for products that require these metals, and other trends.

Thus, investing in precious metals can be risky because they’re susceptible to volatility based on factors that can be hard to anticipate. Even a relatively stable commodity such as gold can be affected by rising or falling interest rates, or changes in the value of the U.S. dollar.

In the case of any commodity, it’s important to remember that you’re often dealing with tangible, raw materials that typically don’t behave the way other investments or markets tend to.

3. Cryptocurrencies

Cryptocurrencies are considered speculative since they fluctuate widely in price and come with high risk and potential high returns. Because the crypto markets are barely 14 years old, there isn’t a lot of history to the market to use for predictions, and no way of knowing whether a crypto like Bitcoin (or Ethereum, Litecoin, Dogecoin) will go to $100K or to $1K within the next year.

4. Bond Market

Asset prices in the bond market fluctuate widely depending on interest rate changes and political and economic conditions. The prices in the U.S. Treasuries market are often strongly influenced by speculation.

Bonds are rated by agencies such as Moody’s and Standard and Poor’s. Highly rated bonds are not considered speculative and are referred to as “investment grade,” while lower-rated bonds are considered speculative and referred to as “junk bonds.” Since junk bonds are riskier, they pay out higher interest rates to investors.

Pros and Cons of Speculative Investment

Speculative investments come with both upsides and downsides. The choice of whether to make speculative investments depends on an investor’s risk tolerance, knowledge about markets, and short- and long-term investment goals.

Pros

Some of the pros of speculative investments include:

• Potential for high returns

Cons

Downsides of speculative investments include:

• Don’t provide income while they are held. (With some exceptions, such as cryptocurrencies that earn interest through staking)

• Risk of losing one’s entire investment

• Requires active trading and time commitment

Speculative Investments vs Traditional Investments

Below are some of the key differences between speculative investing and traditional investing:

Speculative Investments	Traditional Investments
Usually short-term	Long-term
High risk and active	Low- to medium-risk and generally more passive
Includes alternative and niche assets such as art, forex, and crypto	Generally includes traditional assets like stocks, bonds, and index funds

Recommended: What Are Alternative Investments?

Speculative Investments vs Gambling

The difference between speculation and gambling is that speculation involves taking a calculated risk on investing in an asset with an uncertain outcome but an expected return from the asset increasing in value. Gambling involves betting money with an uncertain outcome and the hope of winning more money.

Gamblers could be said to possess a more risk neutral outlook, in that they might disregard even high levels of risk for a potential reward. Speculative investors calculate the risk vs. the reward.

Other Risky Investments

In addition to the speculative investments highlighted above, the following are higher-risk types of investments that can be considered speculative.

Margin Trading

Margin trading involves an investor borrowing money from a broker in order to make a trade rather than using a cash account to buy securities. Usually investors can only borrow up to 50% of the purchase amount of securities they want to buy. For example, if an investor with $3,000 in their account, can borrow $3,000, allowing them to purchase $6,000 worth of securities.

Typically, less experienced, risk-averse investors choose cash accounts vs. margin accounts because of the risks involved with leveraged positions. By using margin, the investor can place bigger bets. But if the trade doesn’t go in their favor they could lose both their own capital and the money they borrowed.

Margin accounts also charge interest, so any securities purchased need to increase above the interest amount for the investor to see a profit. Different brokers charge different interest rates, so it’s a good idea for investors to compare before choosing an account.

Options Trading

With options trading, investors purchase an option that gives them the ability to buy a stock in the future at a particular price if they choose to. In other words, options give holders the right, but not the obligation, to buy or sell an asset like shares of a company stock.

Options holders can buy or sell by a certain date at a set price, while sellers have to deliver the underlying asset. Investors can use options if they think an asset’s price will go up or down, or to offset risk elsewhere in their portfolio.

Options are considered financial derivatives because they’re tied to an underlying asset.

Penny Stocks

Penny stocks are high-risk stocks that have a low dollar value. Investors can buy several shares of them since they are so inexpensive, with the hope that they increase a lot in value over a short period of time. An event such as a big news story could trigger a change in stock value and provide the chance for a trader to cash out.

The Takeaway

Speculative investments are risky, but can provide significant returns and can be a good way to diversify one’s portfolio. They are generally best for active traders looking for short-term investment opportunities, who can tolerate higher levels of volatility and risk.

Speculative investments are often considered non-productive assets, such as foreign and cryptocurrencies or commodities like gold or silver. But some stocks and bonds can be speculative too. Speculation is mainly the opportunity to profit from short-term price movements.

If you’re looking to start trading, consider margin investing with SoFi Invest. SoFi’s online investing app is streamlined and secure, so you can research, track, buy and sell on margin right from your phone or laptop. You can borrow money against your current investments to buy stocks and ETFs.

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

What are some examples of some speculative investments?

Examples of speculative investments include penny stocks, crypto, precious metals, and forex. Many speculative investments fall into the category of non-productive assets, and they’re usually susceptible to volatility, giving investors the opportunity to profit from short-term price movements.

Is speculative investing the same as gambling?

No, gambling involves betting money with the hope that you will win more money, while speculative investing involves buying an asset with the expectation that you will be able to sell it for a profit.

Is Bitcoin considered a speculative investment?

Bitcoin and cryptocurrencies are considered speculative investments because their prices fluctuate widely and are difficult to predict. They are risky and come with the potential for significant gains or losses.

Photo credit: iStock/Delmaine Donson

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

SOIN0822011

Mar

2023

Guide to Protective Collars in Options Trading

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

As an investor in a volatile market, it can be stressful worrying about gains turning into losses from day to day. One strategy to protect your gains is through protective collar options.

Protective collars provide inexpensive near-term downside risk protection on a long stock position, but the strategy also limits your upside.

What Is a Protective Collar?

A protective collar is a three-part strategy:

A long position in a previously purchased underlying asset that has seen a large price increase you wish to protect.
A long put option, also known as a protective put, that provides downside protection to your asset gains.
A call option with the same expiration date as the long put written on the underlying asset, also known as a covered call. Writing this call offsets the cost of purchasing the long put option, but it will also limit the future potential gains on the underlying asset.

As with other options strategies, when you reduce risk, you must give up something in return. In the case of a protective collar option strategy, you limit your upside since you are short calls. Additionally, the sale of calls helps reduce the overall cost of the transaction. It might even be possible to construct a protective collar that generates income when initiated.

Collars in options trading help address price risks. The term “collar” refers to the strike prices of the two options being above and below the price of the underlying asset. The put strike is typically below the current share price while the short call strike is above the price of the underlying asset. Profits are capped at the short call strike price and losses are capped at the long put strike price.

How Do Protective Collars Work?

Protective collars work to hedge against the risk of a near-term drop on your long stock holding without having to sell shares. It’s one of many strategies for options trading to manage risk. If you have a sizable gain on your shares, you might not want to trigger a taxable event by liquidating the position.

Protective collars have many beneficial features:

• Protective collars allow you to initiate the trade cheaply. A protective collar option can be done at a net debit, net credit, or even without cost, known as a “zero-cost collar”.

• Protective collars provide downside risk protection at a level you determine. You will be purchasing a long put. By choosing a put that’s at the money, you will protect the most loss, but at the highest cost.

Conversely by choosing a long put that is out of the money, you pay less up front, but the accepted potential loss will be higher.

• Protective collars allow you to participate in further asset increases, again at a level you determine. By writing a call that’s at the money, you earn the highest premium but limit upside participation and increase the likelihood your shares will be assigned and sold.

• By choosing to write calls that are far out of the money, you will earn lower premiums that can offset the cost of the purchased put option but allow continued participation in any future asset increases. Additionally, the likelihood that the call will be exercised and assigned is lower.

Recommended: Guide to Leverage in Options Trading

Maximum Profit

The maximum profit on a protective collar options position happens at the short call strike. The highest profit is limited to the high strike minus the net debit paid or plus the net credit received when executing the options trade.

Maximum Profit = Short Call Strike Price – Purchase Price of Stock – Net Debit Paid

Maximum Profit = Short Call Strike Price – Purchase Price of Stock + Net Credit Received

Maximum Loss

The maximum loss on protective collar options is limited to the stock price minus the put strike minus the net debit or plus the net credit received.

Maximum Loss = Long Put Strike Price – Purchase Price of Stock – Net Debit Paid

Maximum Loss = Long Put Strike Price – Purchase Price of Stock + Net Credit Received

Break Even

Theoretically, there are a pair of break-even prices depending on how the initial trade was constructed. If it was a net debit protective collar, then the break even is the stock price at trade initiation plus the net debit paid. If the options trade was executed at a net credit, then the break even is the stock price at trade initiation minus the net credit.

Break Even = Stock Price at Trade Initiation + Net Debit Paid

Break Even = Stock Price at Trade Initiation – Net Credit Received

However, for an asset that has seen significant appreciation, the concept of break even is almost irrelevant.

Constructing Protective Collars

Putting on a protective collar strategy might seem daunting, but it is actually quite straightforward. You simply buy a low strike put option and simultaneously sell an upside call option. Of course, you must already own shares of the underlying stock.

The protective put hedges downside risk while the covered call caps gains but helps finance the overall trade. Both options are usually out of the money.

Pros and Cons of Protective Collars

Pros	Cons
Limits losses from a declining stock price while still retaining ownership of the shares	Upside gains are capped at the call strike
There remains some upside exposure	Losses can still be experienced down to the long put strike
Protective collars are cheaper than purchasing puts only	Slightly more complicated than a basic long put trade

When Can It Make Sense to Use Protective Collars?

You might consider implementing a protective collar options position when concerned about near-term or medium-term declines in an equity holding. At the same time, you do not want to sell your shares due to a large taxable gain. For that reason, protective collar options might be more likely to be used in taxable accounts rather than tax-sheltered accounts like an IRA.

With the downside risk hedge also comes the risk that your shares get “called away” if the stock price rises above the short-call strike.

A protective collar can work well during situations in which the market or your individual equity positions lack upside momentum. A sideways to even down market is sometimes the best scenario for protective collar options. During strong bull markets, the play is not ideal since you might see your shares vanish when the underlying stock price gets above the short call strike.

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Protective Collar Example

You own 100 shares of XYZ company that you paid $50 for, and the stock is currently trading at $100. You’re concerned there might be a move lower on your equity stake, but you do not want to trigger a taxable event by selling.

A protective put is an ideal way to address the risk and satisfy your objectives. You decide to sell the $110 strike call for $5 and buy a $90 strike put for $6. The total cost or net debit is $1 per share or $100 per option, each option represents 100 shares.

If the price rises above the short call strike price of $110 to $115:

Unrealized Profit on Stock Position = Current Price – Purchase Price

Unrealized Profit on Stock Position = $11,500 – $5,000 = $6,500

Maximum Profit = Short Call Strike Price – Purchase Price – Net Debit Paid

Maximum Profit = $11,000 – $5,000 – $100 = $5,900

You have given up $600 of potential profit to protect your downside risk.

If the stock trades anywhere between $90 and $110, For example $105:

Unrealized Profit on Stock Position = Current Price – Purchase Price

Unrealized Profit on Stock Position = $10,500 – $5,000 = $5,500

Profit = Current Price – Purchase Price – Net Debit Paid

Profit = $10,500 – $5,000 – $100 = $5,400

You have paid $100 to protect your downside risk. It may also have been possible to choose options that would have allowed you to profit on the protective collar.

If the price drops below the long put strike price of $90 to $85:

Unrealized Profit on Stock Position = Current Price – Purchase Price

Unrealized Profit on Stock Position = $8,500 – $5,000 = $3,500

Maximum Loss = Long Put Strike Price – Purchase Price of Stock – Net Debit Paid

Maximum Profit = $9,000 – $5,000 – $100 = $4,000

You have avoided additional losses of $500 by purchasing the protective collar.

Collars and Taxes

Nobody likes paying unnecessary capital gains taxes. Protective collar options can be used to avoid that scenario. The strategy offers downside risk control while allowing you to keep your shares.

You still might be required to sell your stock to the holder of the calls you wrote, though. If you decide to sell your shares to the put owner, that too will trigger a taxable sale. The potential taxes can’t be avoided using this strategy, but they can be deferred, let’s say into next year, and this can be valuable in itself.

The Takeaway

Protective collar options are used to guard against near-term losses on a long stock position. The combination of a protective put with a covered call offers a low-cost way to help control risk. It can also be a tax-savvy move to protect an unrealized gain without triggering a taxable event as you would when selling shares.

If you’re ready to try your hand at options trading, SoFi can help. You can trade options from the SoFi mobile app or through the web platform. And if you have any questions, SoFi offers educational resources about options to learn more.

With SoFi, user-friendly options trading is finally here.

FAQ

Are protective puts worthwhile? When does it make sense to buy protective puts?

Protective puts can make sense if you are concerned about bearish price action on your underlying stock position. They are worthwhile if you have a strategy with respect to timing, direction, and price of the trade.

What does protective, covered, and naked mean in options?

“Protective” in options trading refers to having downside risk protection should a stock position drop in price. A protective put, for example, rises in value when shares fall.

“Covered” in options parlance means that you are writing call options against an asset you currently own.

“Naked” is when you are writing call options that you do not currently own.

What are the benefits of collar trades?

Protective collar options trades are used when you are bullish on a stock but are concerned about near-term downside risk. A major benefit is that the strategy helps to cushion losses if the underlying stock drops. Since the strategy assumes you own shares of the underlying asset, a combination of a protective put and a covered call help to keep costs low on the trade. That is a major benefit to traders looking to protect a long stock position.

Photo credit: iStock/Prostock-Studio

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN0422032