Dec
15
2022
What Is a Carbon Tax?

What Is a Carbon Tax?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Carbon Tax?

In countries where there is a carbon tax, businesses must pay a levy based on the amount of carbon emissions produced by their business operations. A carbon tax is designed to reduce the amount of carbon — also known as CO2 emissions.

There are two types of carbon taxes: a tax on quantities of greenhouse gases emitted, and a tax on carbon-intensive goods and services such as gasoline production.

In the United States, several carbon tax proposals have been introduced in Congress, but none have yet been implemented.

How Does a Carbon Tax Work?

When a government implements a carbon tax, a price per ton of greenhouse gas emissions is chosen, and a company gets taxed that amount for every ton they emit or are responsible for.

In some cases, the price per ton increases the more an entity emits, thereby incentivizing companies to reduce and prevent emissions.

What Type of Carbon Is Taxed?

Although it is called a carbon tax, usually the price is actually per ton of CO2 gas emitted. That’s because every fossil fuel has a particular amount of carbon content in it, and when burned each carbon molecule combines with two oxygen molecules and becomes CO2 gas which goes into the atmosphere.

So the amount of emissions associated with the fuel can be taxed at the point of extraction, refinement, import, or use.

As many ESG investors know, burning coal emits the highest amount of CO2, followed by diesel, gasoline, propane, and natural gas. Therefore, coal gets taxed higher than other fossil fuels. Once CO2 is emitted into the atmosphere, it remains there for a hundred years or more, creating a greenhouse effect which heats up the planet and leads to climate change.

Only products associated with the burning of fossil fuels get taxed. So products such as plastic that contain petroleum but don’t directly result in CO2 emissions don’t get taxed.

What Is the Economic Impact of Carbon Taxation?

Since a carbon tax increases costs across the entire supply chain, everyone from extractors to consumers are incentivized to reduce fossil fuel consumption — at least in theory.

Those being taxed can raise the prices of their goods and services, but only as much as the market is willing to pay while allowing them to remain competitive.

What Is the Social Impact of Carbon Emissions?

The theory around carbon pricing is that each ton of CO2 should have a price equal to the social cost of carbon. The social cost of carbon is the current amount of estimated damages over time that each ton of CO2 emitted causes today.

In addition to causing global warming, emissions and pollution typically lead to negative effects on human health and natural ecosystems. Thus investing in companies with lower carbon emissions can be considered a type of socially responsible investing.

Over time, the social cost of carbon increases, because each ton of emissions is more damaging as climate change worsens. Therefore, the price of carbon and the tax would increase over time.

Those producing emissions know that the tax will increase over time, and so investments into decarbonization are worth it to them today. For instance, a company can invest in solar energy and wind power, and while that might have a high upfront cost for them, over time it could be worth it could help them avoid a rising carbon tax.

Examples of Carbon Taxes

Understanding carbon taxes is an important facet of sustainable investing. Carbon taxes have been put into place in many countries around the world so far, and their popularity is rising. As of 2021, 35 countries had a form of carbon tax or energy tax.

•   Finland was the first country to implement a carbon tax in 1990, soon followed by Norway and Sweden in 1991. In 2021 Finland’s price per ton was $73.02. Norway is known to have one of the strictest carbon taxes.

•   The Canadian province of British Columbia implemented a carbon tax in 2008. In 2019, South Africa became the first African country to install a carbon tax.

•   Although there is not yet a federal carbon tax in the U.S., there are more than 50 regional ones. For instance, the city of Boulder, CO, implemented a carbon tax in 2006 after it passed a local vote. However, the average price per ton across these programs is very low: generally about $2.

Support for a U.S. federal carbon tax has been growing over time, but one of the things holding it back is debate about how the revenue from the tax would be used. A few ideas include: paying back consumers through a carbon dividend; using the money to fund infrastructure upgrades or low-emissions technologies, or reducing other taxes.

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The Importance of Carbon Tax

Reducing global emissions is essential to stop the buildup of CO2 in the Earth’s atmosphere. The more CO2 gets emitted, the more the planet warms and the worse climate change becomes — including the frequency of climate-related disasters.

Global temperatures have already increased 1°C over pre-industrial levels, and if emissions are not reduced temperatures are projected to rise 4°C by the end of this century. The more temperatures rise the more the effects become irreversible and catastrophic.

A carbon tax is a powerful tool to discourage the use of fossil fuels and incentivize a shift to low- and zero-emission energy sources. This is why many people invest in green stocks.

Pros and Cons of Carbon Tax

There are several pros and cons to a carbon tax.

Some of the pros of a carbon tax include:

•   The carbon tax is a way to regulate emissions without having to actually mandate production and consumption limits directly.

•   Carbon taxes incentivize companies and individuals to reduce and avoid emissions.

•   Carbon taxes are easy to administer.

•   A carbon tax may help reduce the buildup of greenhouse gasses, which in turn may help reduce pollution, improve air and water quality, and more.

•   The revenue raised through a tax can be used to fund decarbonization efforts, environmental restoration, and other projects.

•   Other programs, such as an incentive using renewable energy, haven’t been as successful in reducing fossil-fuel use.

A few cons of a carbon tax include:

•   It can be challenging to figure out how the revenues should be spent.

•   A carbon tax can be put on any point of a supply chain and it’s hard to decide which is best.

•   It’s hard to predict how much emissions will be reduced as a result of the carbon tax.

•   If a carbon tax increases energy costs, this can have a big impact on lower-income households which tend to spend a higher percentage of their income on energy than higher-income households.

•   If one country implements a carbon tax and others don’t, then that puts local industries at a competitive disadvantage. If they have to raise prices, customers may start buying from the countries that don’t have the tax, resulting in the same or more emissions. For this reason carbon tax plans build in ways to prevent emissions leakage and issues with competition. Some of these include rebates, exemptions for particular industries, and taxation based on past emissions.

•   Companies can purchase carbon offsets or carbon credits to lower the amount they pay in taxes. They can also use those offsets to claim that they are carbon neutral or carbon negative. This isn’t exactly true, since they are still emitting carbon. The ability to purchase offsets reduces their incentive to decarbonize.

Who Regulates Carbon Taxes?

Carbon tax programs are regulated by federal, state, or local governments. Regulation involves setting the price per ton of carbon, deciding which entities get taxed, collecting the tax, and deciding how the revenues are spent.

There is an ongoing discussion about the international coordination of carbon pricing. If a minimum price per ton is set, this would eliminate issues around competition and guarantee a certain amount of effort towards emission reduction. Canada has already implemented national price coordination. The minimum price per ton in Canadian provinces and territories is CAD $50.

Which Countries Have the Highest Carbon Tax?

Below are a few of the countries that have the highest carbon tax rates. The rates are in USD price per ton:

•   Uruguay: $137

•   Sweden: $129.89

•   Switzerland: $129.86

•   Liechtenstein: $129.86

•   Norway: $87.61

The Takeaway

A carbon tax can be a powerful tool for reining in carbon emissions, and potentially helping reduce the amount of greenhouse gasses in the atmosphere. Essentially, these taxes penalize companies by making them pay a fee for CO2 emissions relating to their products or operations.

While the U.S. doesn’t have a federally mandated carbon tax, there are state and local levies. Given concerns about climate change, it’s likely that more countries will continue to adopt and adjust carbon taxes.

If you’re interested in investing in sustainably focused businesses, you can explore your options using SoFi Invest, and start trading from your Active Invest account with as little as $5.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/Delmaine Donson

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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.
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Dec
15
2022
MekaVerse NFTs: Everything You Need to Know

A Guide to MekaVerse NFTs

By | Growing Wealth, invest, Investing | Comments Off on A Guide to MekaVerse NFTs

The MekaVerse NFT collection is one of the most hyped and talked-about non-fungible token collections of the past couple of years. While there are many other NFTs that have caputured the attention of investors and others in the crypto space, MekaVerse NFTs is a collection of nearly 9,000 robot-inspired images, each with their own unique stories. That is one of the primary reasons that made them so enticing to investors.

Curious about this new NFT collection? This guide will explain what MekaVerse NFTs are, their history, and everything else you need to know.

Recap: What Is an NFT?

Before getting to MekaVerse NFTs, it’s worth quickly recapping the basics about NFTs.

NFT stands for “non-fungible token,” which is a type of digital asset that typically, but not always, takes the form of some sort of artwork. One way to think of it is that NFTs are much like a digital version of a baseball card — assuming only one copy of the baseball card exists.

NFTs have unique, identifiable metadata codes, meaning that they cannot be copied, and as such are one-of-a-kind. On the other hand, fungible tokens, like Bitcoins, have many copies — they are all the same, and nothing distinguishes one Bitcoin from another. There are also numerous NFT collections. MekaVerse NFTs are one of them, and CryptoPunks is another.

Note, too, that NFTs are somewhat controversial. There is some serious concern about the environmental impact of NFTs, for instance, in a similar vein to concerns around Bitcoin and other cryptocurrencies. The NFT market is rife with scams as well, which opens up some investors to risk.

What Is MekaVerse NFT?

The MekaVerse NFT collection (which you can view here on OpenSea ) is an NFT project that launched in October 2021, and it features 8,888 NFTs. The NFTs themselves feature a very specific artwork style, each boasting robots that are commonly known as “Mekas.” These Mekas are inspired by Gundam-style robots, which is itself a fictional Japanese anime franchise that features giant military robots called “mechas.” Each individual Meka has its own, unique story, or lore, that comes with it.

Since NFTs hit the mainstream over the past few years, the MekaVerse collection is perhaps the most-hyped collection release to date. Its Discord server has thousands of members, and it has more than 250,000 followers on Twitter .

History of MekaVerse

How does a collection of mecha NFTs become one of the most-followed digital asset drops in history? Here’s a brief rundown of the project’s history.

Who Created MekaVerse NFT?

The two main people behind the MekaVerse project are “Matt” and “Mattey,” two European digital and graphic artists. They teamed up with Julien van Dorland, a veteran of the NFT landscape, and in late August 2021, MekaVerse opened social media and Discord accounts to the public to get a look at the NFT artwork.

From there, the project took off.

How Was MekaVerse Created?

The MekaVerse project started a public raffle that was held in early October 2021, with the winners getting a chance to mint NFTs featuring either one or two Mekas. Those NFTs were then made public on OpenSea, an NFT marketplace. There was massive demand, too, as users registered nearly 173,000 wallets for the raffle.

On October 13, 2021, the complete MekaVerse NFT project was revealed . Sales for MekaVerse NFTs commenced, with sales averaging well into the thousands of dollars, and more than 5,000 individuals becoming MekaVerse NFT owners in the subsequent months.

How Do MekaVerse NFTs Work?

The project’s collection of nearly 9,000 NFTs is designed to capitalize on the “scarcity” aspect of NFTs, and therefore, increase their value. Each individual Meka in the project is a unique, three-dimensional creation, further adding to its perceived value.

MekaVerse NFTs work no different than any other NFT, too. They’re unique digital items, and are stored in digital wallets. In that sense, owning or possessing one is the same as owning an NFT from another collection, such as World of Women NFTs.

Further, when someone becomes a holder of a MekaVerse NFT, they become a part of the Meka’s corresponding “faction,” and can then gain access to exclusive events on Twitter and Discord.

How to Buy MekaVerse NFTs

The MekaVerse NFT collection is open to traders, collectors, and NFT investors. It’s housed on OpenSea, which is one of the world’s largest NFT marketplaces.

To browse or buy, you can simply go to the MekaVerse NFT collection on OpenSea , and take a look at all of the NFTs that are available. The marketplace has data related to pricing, bidding, and more. You can make an offer or buy NFTs on OpenSea.

But note that it’ll require that you use Ethereum (ETH), to do so. So, before you can actually make the purchase, you’ll need to create an account, get an Ethereum wallet, and attach it to your OpenSea account, so as to facilitate the transaction.

How Much Do MekaVerse NFTs Cost?

Since NFTs are commodities and traded on a marketplace, their prices are in flux. But if you’re looking for a straightforward answer as to how much MekaVerse NFTs cost, here’s one: They aren’t cheap.

Well, as of November 2022, they might be cheaper than they were in mid-December 2021, when the median price for a MekaVerse NFT was more than $4,500 (although they’re priced in ETH). But some have sold for much more. Around the time the project launched, some NFTs were selling for hundreds of thousands of dollars.

As of November 2022, though, the median price for a MekaVerse NFT is less than $400.

Most Expensive MekaVerse NFT

To date, the most expensive MekaVerse NFT to sell was Meka #2194 , which sold in late December 2021 for more than 500 ETH. At the time, ETH was trading for around $3,700, which puts the sale price for Meka #2194 at roughly $1.8 million.

As of November 2022, however, the most expensive MekaVerse NFT is Meka #2613, which sold in mid-November for $18,000.

Negative Sentiment Around MegaVerse NFTs

Every project has its issues and detractors, and the MekaVerse project is no different.

For instance, in the early days of the project, there were some delays in revealing some of the NFT images, which led to some lost momentum prior to launch. But those concerns were seemingly dwarfed by allegations of fraud, which surfaced on Twitter after the project launched.

In short, some people allege that certain buyers had early access to metadata (something inherent to all crypto collectibles), giving them an inside look at what images would be contained in certain NFTs — information that wasn’t available to everyone. That means that some buyers could have gotten their hands on high-value NFTs at lower prices, only to see their values shoot up later on.

There’s also been some criticism of the project due to the seeming lack of uniqueness among the NFT images. Some of the images appear to simply have colors swapped, rather than be a completely different Meka.

And finally, there have been some significant concerns about the viability of NFT projects and crypto in general following the significant drop in the cryptocurrency markets during 2022. As discussed, MekaVerse NFTs that were selling for hundreds of thousands of dollars are now selling for hundreds of dollars.

This is all to say that NFTs are speculative and risky investments, and investors should treat them as such.

Was the Negative Hype Justified?

Looking back at the negative hype surrounding the MekaVerse NFT project, it’s easy to say that it was, indeed, justified. That might apply to the entire crypto sphere, too, as values have fallen considerably during 2022.

On a smaller scale, though, it’s hard to say whether the negative sentiment about the MekaVerse project stemming from fraud allegations was likewise justified. Again, the issues relating to a lack of uniqueness among NFTs, and the potential for insider trading or front running, too, is an issue that most or all NFT projects are contending with.

Is the MekaVerse Still Worth Looking At?

Whether or not the MekaVerse is still worth looking at will come down to an investor’s personal preference. Values for NFTs have already fallen significantly, and it’s not hard to imagine that they could continue to decline. On the other hand, there could be a crypto bull run in 2023 — we simply don’t know.

So, from an investment standpoint, NFTs in general should still be considered very risky. There’s a chance that the market could bounce back, but no guarantees.

For simple NFT collectors? The MekaVerse collection could still be worth checking out, especially now that prices are down.

The Takeaway

The MekaVerse NFT collection was one of the most-hyped collections to be released to date. The thousands of mecha-inspired art pieces are still sought-after by collectors and investors, but values have fallen in a big way during the so-called crypto winter of 2022. Further, the MekaVerse team does have a roadmap in place for the future, which includes bringing the MekaVerse into the physical world with clothing and toys. There are also plans to airdrop free NFTs to current holders, which may include “weapons” and “companions” in future online games or events.

Remember, though, that the NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital asset, it’s important to research and understand the market.

FAQ

Did MekaVerse start on Discord?

The MekaVerse didn’t necessarily start on Discord, but it did gain a lot of traction on Discord. At one point in time, the MekaVerse Discord had a member count in the six-figures, which helped the project gain early hype, and ultimately, launch as a success.

Photo credit: iStock/Space_Cat

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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.
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15
2022
What Is Portfolio Margin?

What Is Portfolio Margin?

By | Growing Wealth, invest, Investing | Comments Off on What Is Portfolio Margin?

Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining may provide investors with lower margin requirements, allowing them to use more of their capital in trades.

Portfolio Margin, Defined

Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.

If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.

How Does Portfolio Margin Work?

Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.

To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.

The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.

For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.

Margin vs Portfolio Margin

Here’s a closer look at how margin vs. portfolio margin compare:

•   Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.

   Borrowing money, however, poses a risk to the lender. For this reason, the lender requires that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.

   Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade.

•   Portfolio margin, on the other hand, calculates the required deposit amount based on the risk level of the investor’s overall portfolio. It looks at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.

This chart spells out the differences:

Regulation T Margin

 Portfolio Margin
Maintenance margin = 50% of initial margin Initial and maintenance margin is the same
Traders can’t use margin on long options, and long options have a 100% requirement Traders can use margin on long options, and they can use long options as collateral for other marginable trades
Margin requirements are fixed percentages Trader’s overall portfolio is evaluated by offsetting positions against one another
Margin equity = stock + (+/- cash balance) Buying power (maintenance excess) = net liquidation value – margin requirements
Less flexibility on margin requirements Broad-based indices allow for more leverage
Margin requirement is a fixed percentage of trade amounts Stock volatility and hypothetical future scenarios are part of portfolio margin calculation

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Portfolio Margin and Volatility

Portfolio margin calculations take into account investing in volatile markets by factoring in the outcome of various scenarios. Read on to learn more.

Portfolio Margin Calculation

Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.

The steps are:

1.    Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.

2.    Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.

3.    Incorporate implied volatility into the calculated risk array.

4.    Calculate the largest possible loss that could occur with each theoretical scenario. That amount is the margin requirement.

💡 Recommended: Calculating Margin for Trading

Key Considerations

Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:

•   Margin trading is very risky and is not recommended for beginning traders

•   Traders must keep $100,000 net liquidating value in their portfolio margin account (this is not the same as a client’s margin account). If the account goes below this, they may lose their active trading positions and the ability to trade on margin.

•   Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.

If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.

Portfolio Margin Requirements

The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.

Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS) . TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.

To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.

There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank. Other regulations regarding the way brokers handle margin accounts include Nasdaq Rule 2860 , New York Stock Exchange Rule 431 , and the Financial Industry Regulatory Authority (FINRA) Rule 721 .

Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.

The Takeaway

Margin trading may be very profitable and is a tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading for derivatives, however, portfolio margin may free up more capital for trading.

If you have the experience and the risk tolerance to try out trading on margin, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 11%*

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*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.
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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.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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14
2022
What Is a Shareholder Activist?

What Is a Shareholder Activist?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Shareholder Activist?

A shareholder activist is a hedge fund, institutional investor, or wealthy individual who uses an ownership stake in a company to influence corporate decision-making. Shareholder activists, sometimes called activist investors, typically seek to change how a company is run to improve its financial performance. However, they may also have other objectives, such as increasing transparency or promoting social responsibility.

Activist shareholders can impact the way a company is managed, thus affecting its stock price. As such, you may benefit from understanding shareholder activism and how these investors may impact the stocks in your portfolio.

How Shareholder Activism Works

Shareholder activism is a process where investors purchase a significant stake in a company to influence the management of the company. When an investor builds up a large enough stake in a company, this usually opens up channels where they may discuss business proposals directly with management.

Activist investors may also use the shareholder voting process to wield influence over a company if they believe it is mismanaged. This more aggressive tactic may allow activist shareholders to nominate their preferred candidates for the board of directors or have a say on a company’s management decisions.

Activist investors typically own a relatively small percentage of shares in a company, perhaps less than 10% of a firm’s outstanding stock, so they may need to convince other shareholders to support their proposals. They often use the media to generate support for their campaigns, discussing their plans with CNBC, Bloomberg, The Wall Street Journal, and other outlets.

Shareholder activists may also threaten lawsuits if they do not get their way, claiming that the company and its board of directors are not fulfilling their fiduciary duties to shareholders.

💡 Recommended: Stakeholder vs. Shareholder: What’s the Difference?

Activist investors’ goals can vary. Some investors may want to see companies improve their environmental and social impact, so they will suggest that the company adopt a Corporate Social Responsibility framework. Other investors try to get the company to adopt changes to unlock shareholder value, like selling a part of the company or increasing dividend payouts.

However, shareholder activism can also be a source of conflict between shareholders and management. Some activist investors may prefer the company unlock short-term gains that benefit shareholders, perhaps at the expense of long-term business operations. These investors may exit a position in a company once they unlock the short-term gains with little concern for the company’s future prospects.

Types of Shareholder Activists

There are three primary types of shareholder activists: hedge funds, institutional investors, and individual investors. Each type of shareholder activist has its distinct objectives and strategies.

Hedge Funds

Hedge funds are private investment vehicles usually only available to wealthy individuals who make more than $200,000 annually or have a net worth over $1 million. These funds often take a more aggressive approach to shareholder activism, like public campaigns and proxy battles, to force a company to take specific actions to generate a short-term return on its investment.

Institutional Investors

Institutional investors are typically large pension funds, endowments, and mutual funds that invest in publicly-traded companies for the long term. These investors often use their voting power to influence a company’s strategy or management to improve their investment’s financial performance.

Individual Investors

Though less common than hedge funds and institutional investors, very wealthy individual investors sometimes use their own money to buy shares in a company and then push for change.

Examples of Shareholder Activists

Shareholder activism became a popular strategy in the 1970s and ‘80s, when many investors – called “corporate raiders” – used their power to push for changes in a company’s management. Shareholder activism has evolved since this period, but there are still several examples of activist investors

For example, Carl Icahn is one of the most well-known shareholder activists who made a name for himself as a corporate raider in the 1980s. He was involved in hostile takeover bids for companies such as TWA and Texaco during the decade.

Since then, Icahn has been known for taking large stakes in companies and pushing for changes, such as spin-offs, stock buybacks, and management changes. More recently, Icahn spearheaded a push in early 2022 to nominate two new directors to the board of McDonald’s. His goal was to get McDonald’s to change its treatment of pigs. However, his preferred nominees failed to get elected to the board.

Another well known activist investor is Bill Ackman, the founder and CEO of Pershing Square Capital Management, a hedge fund specializing in activist investing. Ackman is known for his high-profile campaigns, including his battle with Herbalife.

In 2012, Ackman shorted the stock of Herbalife, betting the company would collapse. He accused Herbalife of being a pyramid scheme and called for a government investigation. Herbalife denied the allegations, and the stock continued to rise. Ackman eventually closed out his position at a loss.

💡 Recommended: Short Position vs Long Position, Explained

Other examples of shareholder activists include Greenlight Capital, led by David Einhorn, and Third Point, a hedge fund founded by Dan Loeb.

In 2013, Einhorn took a stake in Apple and pushed for the company to return more cash to shareholders through share repurchases and dividends. Apple eventually heeded his advice and initiated a plan to return $100 billion to shareholders through dividends and buybacks.

In 2011, Loeb’s hedge fund took a stake in Yahoo and pushed for the company to fire its CEO, Scott Thompson. Thompson eventually resigned, and Yahoo appointed Loeb to its board of directors. More recently, in 2022, Loeb took a significant stake in Disney and started a pressure campaign calling on the company to spin-off or sell ESPN. However, he eventually backed off that suggestion.

Is Shareholder Activism Good for Individual Investors?

Depending on the circumstances, a shareholder activist campaign may be good for investors. Some proponents argue that shareholder activism can improve corporate governance, promote ESG investing, and lead to better long-term returns for investors.

Others contend that activist investors are primarily interested in short-term gains and may not always have the best interests of all shareholders in mind. While individual investors may benefit from a stock’s short-term spike after an activist shareholder’s campaign, this rally may not last for investors interested in long-term gains.

The Takeaway

Shareholder activists use their financial power to try to influence the management of publicly traded companies. Because activist investors often leverage the media to promote their goals, individual investors may read about these campaigns and worry about how they could affect their holdings.

Generally, the impact of shareholder activism on investors depends on the specific goals of the activist and the response of the company’s management. If an activist successfully pressures management to make changes that improve the company’s performance, this can increase shareholder value. However, if an activist’s campaign is unsuccessful or the company’s management resists the activist’s demands, this can lead to a decline in the stock price.

Though it seems like the actions of activist investors can lead to stock volatility and uncertain outcomes, it doesn’t mean you should avoid investing in the targeted companies. The stocks targeted by a shareholder activist can still be part of a well-rounded portfolio, particularly if you believe in the proposed changes. And if you want to build your own diversified portfolio, SoFi can help. With a SoFi online brokerage account, you can buy and sell stocks and exchange-traded funds (ETFs) with no commissions, for as little as $5.

Take a step toward reaching your financial goals with SoFi Invest.

Photo credit: iStock/xavierarnau

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.

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Dec
14
2022
Is Trading on Margin a Good Idea?

Risks and Benefits of Margin Trading: Is It a Good Idea?

By | Growing Wealth, invest, Investing | Comments Off on Risks and Benefits of Margin Trading: Is It a Good Idea?

Trading on margin offers traders the opportunity to amplify their returns using borrowed money. However, investors should understand that trading on margin operates like a double-edged sword; while it allows you to multiply your gains, it can also multiply your losses.

At its core, margin trading involves borrowing from your broker to increase your purchasing power. This allows you to buy well beyond the actual cash you have at your disposal. We’ll cover the mechanics of how this works, as well as the risks and benefits of undertaking such a strategy.

Understanding Margin Trading

Margin trading means borrowing funds from your broker and using those funds to buy securities. Any borrowed funds must be repaid, with interest, regardless of whether or not you earn a profit on your trade. If you’re wondering about the difference between leverage vs. margin, basically margin is a form of leverage.

When trading on margin, your broker will require you to post cash collateral to match a percentage of the funds you borrowed. This is known as the margin, and the exact amount is set by your broker, the type of security traded, and prevailing market conditions.

Risks and Benefits of Margin Trading

We spell out some of the most obvious risks and benefits to margin trading below.

Risks

 Benefits
Amplified losses Enhanced returns
High interest expense Added liquidity
Risk of margin call No set repayment schedule

Benefits of Margin Trading

Enhanced returns: The main benefit to margin trading is its ability to magnify your exposure to trades. This offers the potential for greater earnings thanks to the additional shares you accumulate (as well as the potential for loss).

Added liquidity: Assuming you remain inside of acceptable maintenance margin requirements, margin trading grants additional buying power to smaller cash balances, which can be useful if you don’t want to liquidate existing holdings.

No set repayment schedule: Unlike standard fixed loans, there’s no repayment schedule for repaying your margin loan. The interest accrues while your balance remains outstanding, and is only repaid once the position is closed.

Risks of Margin Trading

Amplified losses: Due to the larger position size afforded through margin trading, your losses will also be greater in the event the market moves against you.

High interest expense: Interest rates on margin loans can range from low single digits to as high as 11% or more, depending on your broker and the size of your margin balance. At best, this is a drag on investment returns; at worst, an additional cost you have to pay on a loss.

Risk of margin calls: If at any point, the value of your investments fall beneath a broker’s posted margin requirements, you will be required to deposit additional collateral to cover the shortfall. This is known as a margin call.

Failure to meet a margin call can result in a forced sale of your security, additional charges, and other penalties as dictated by your brokerage firm’s policies.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

Is Margin Trading Ever Not Risky?

Under no circumstances is margin trading ever considered free of risk. The core precept of all investing involves risk, and leveraged strategies like margin trading increase risk exposure.

Unlike cash accounts, which limit your losses to the value of your initial investment, margin accounts can result in losses that exceed the value of your initial deposit.

Is Margin Trading a Good Idea for You?

Margin trading isn’t for all investors, and its suitability depends on both the scenario as well as the experience and knowledge of each individual investor.

Trading on margin can be useful when you have a high conviction short-term trade idea and wish to overweight your exposure to that trade.

It can also provide the benefit of additional liquidity when much of your cash is tied up in existing investments that can’t be quickly unwound.

When considering margin trading, investors need to be willing and able to absorb any potential losses associated with this strategy. Make sure you fully understand the dynamics of each trade before opening a margin position.

Alternatives to Margin Trading

Given the high risk of loss associated with margin trading, it’s important for investors to explore other options. There are several alternatives to margin trading.

Keep in mind that under all scenarios cited, the magnified gain and loss dynamics still apply, and may or may not exceed the potential losses or gains a trader can obtain by trading on margin.

Penny Stocks

Penny stocks offer investors exposure to large swings in value, thanks to the low cost of each individual share. However, penny stocks are often cheap for a reason. Investors should conduct their own due diligence to understand the dynamics of any new holding they consider.

Crypto Investing

Cryptocurrencies are relative newcomers on the investment scene. The crypto space barely existed before Bitcoin launched in 2009.

Today, there are thousands of different crypto coins and tokens. These are high volatility investments that can change dramatically in value day to day.

The underlying technology is complex and can expose investors to the risk of total loss. Make sure you understand the risk reward dynamics of such a trade before buying any cryptocurrency.

Margin Trading With SoFi

If you’re looking to enhance your investment toolbox, SoFi offers margin loans through its trading app. Eligible members can obtain margin loans on their investments at a competitive annual interest rate.

Check out margin investing with SoFi to learn more.

FAQ

What are the downsides of trading on margin?

Trading on margin involves a number of possible downsides, including added interest costs, heightened portfolio volatility, and magnified losses that may exceed the value of your initial investment.

Do some people make a lot of money trading on margin?

Trading on margin can amplify your potential investment returns thanks to the added buying power it offers. However, this multiplier effect swings both ways and will amplify the size of your loss, should the market move against you.

Is margin trading a good long-term investment strategy?

Margin trading is a form of leveraged trading and therefore not recommended for long-term investors. Over extended periods of time, there’s a heightened risk that market volatility may force a margin call.

The added interest expense incurred by margin loans can act as a drag on your investment returns. This introduces an additional cost that you must cover, should your investment fail to outperform the interest expense incurred on your margin loan.

Photo credit: iStock/valentinrussanov

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.
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